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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB/A
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 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.
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(Exact name of small business issuer as specified in its charter)
California 95-4145930
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(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
3861 Sepulveda Blvd., Culver City 90230
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(Address of principal executive offices) (Zip Code)
(310) 751-2100
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(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock
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(Title of Class)
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
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
The registrant's revenues for its most recent fiscal year were $6,681,280.
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $56,532,146 based on the average bid and asked prices of $13.81
per share as quoted on the Nasdaq National Market on March 25, 1999.
The number of outstanding shares of the registrant's common stock, as of March
25, 1999, was 6,163,874.
Documents Incorporated by Reference: Portions of the registrant's definitive
Proxy Statement to be delivered to shareholders in connection with their Annual
Meeting of Shareholders to be held in June 1999 are incorporated into Part III
of this Annual Report.
Transitional Small Business Disclosure Format: Yes No X
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PART I
Item 1. Description of Business
Forward-looking Statements
Discussion of certain matters contained in this Annual Report on Form 10-K may
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Reform Act") and, as such, may
involve risks and uncertainties. Those forward-looking statements relate to,
among other things, expectations of the business environment in which the
Company operates, projections of future performance, product introductions,
perceived opportunities in the market and statements regarding the Company's
mission and vision. The Company's actual results, performance and achievements
may differ materially from the results, performance and achievements expressed
or implied in such forward-looking statements. From time to time, the Company
details other risks with respect to its business and financial results and
conditions in its filings with the Commission.
The Company
ModaCAD, Inc. ("ModaCAD" or the "Company") is a developer and provider of
technologies and digital content for electronic merchandising in the fashion,
accessories, footwear, cosmetics, home furnishing, decorating and improvement
industries ("the Style Industries"). ModaCAD has developed technologies designed
to manage, search and display such digital content, enabling advanced product
visualization for electronic commerce ("e-commerce"). These technologies enable
the creation of intelligent shopping agents, allowing compatible search engines
to become aware of, and match content against, user searches. Furthermore,
ModaCAD has developed visual methods of displaying such content in graphically
rich environments designed to increase user perception of visual details.
ModaCAD was founded 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. The Company's goal at its
inception was to develop software that would enable non-technical users to
create and model three-dimensional ("3-D") objects from two-dimensional ("2-D")
images and to render such objects in real time with photorealistic quality for
purposes of industrial visualization. Until 1992, the Company was primarily
engaged in research and development and generated limited revenues from product
sales. In late 1992, the Company began expanding into the larger and
faster-growing electronic merchandising market. Beginning in 1993, the Company
began broader marketing efforts to commercial accounts, which efforts were
increased in 1994 and 1995.
In the past ten years, ModaCAD's primary focus has been in the
business-to-business marketplace, and in the consumer software industry. In the
business-to-business marketplace, the Company's initial focus was on designing
computer-aided design ("CAD") products for the industrial design segment of the
textile and apparel industries. The Company also offered a variety of electronic
merchandising software products to manufacturers and retailers doing business in
the Style Industries, which have been used to support their customers'
business-to-business electronic commerce efforts primarily in the area of
merchandising, store planning, assortment planning and product development. In
the consumer software industry, ModaCAD developed a family of consumer software
products aimed at the do-it-yourself home decorating and design marketplace. It
subsequently developed consumer software for use by and in connection with the
fashion apparel industry.
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In 1998, ModaCAD began to shift its focus to the emerging consumer Internet
electronic commerce market, using its technologies and data bases developed for
the business-to-business market to position the Company as a key enabler of
electronic commerce for the Style Industries.
To accelerate this shift of focus, in early 1999, ModaCAD entered into an
agreement with Lectra Systems, Inc. ("Lectra") the subsidiary of Lectra Systemes
SA of France. Lectra Systemes SA is one of the world's largest suppliers of CAD
and computer aided manufacture ("CAM") systems to the fashion and home
furnishing industries and is active world-wide through a network of 35
subsidiaries. Under this agreement, ModaCAD sold its CAD business-to-business
product lines to Lectra, subject to the rights of RunTime A/S ("Runtime") under
its distribution agreement in Europe, and shifted most of the related
development and support costs to Lectra, while retaining ownership of its core
technology and the right to distribute cataloging for electronic merchandising
products in its own markets. ModaCAD and Lectra will cooperate in linking
business-to-business technologies and in attracting customers to ModaCAD's
business-to-consumer emerging strategies. ModaCAD anticipates that its agreement
with Lectra will accelerate its capacity to focus on creating, marketing and
servicing Internet web sites and other Internet applications in both the
business-to-business and business-to-consumer market places, and software for
electronic commerce.
Products
ModaCAD's products are divided into three major classes: (i) consumer software
applications on CD-ROM for e-commerce; (ii) Internet based e-commerce sites
intended to search and manage digital content and facilitate Internet commerce
targeted at the consumer marketplace; and (iii) business-to-business electronic
applications which include Internet applications and electronic merchandising
products that facilitate the creation and visualization of digital content
modeled and rendered utilizing the Company's core technologies.
Consumer software, CD-ROM Applications
The precursor to the Company's Internet e-commerce strategy was a series of
consumer software applications directed at various aspects of the Style
Industries, which the Company developed beginning in 1996. ModaCAD developed the
software known as the 3D Home Interiors product line, under a Software
Development and Publishing Agreement with Broderbund (the "Broderbund
Agreement") which appointed Broderbund as publisher. This product line was
extended in 1997 with the publication of 3D Home Suite. These products offer
consumer home design and decorating tools, including shopping and reference
materials for actual products of various participating vendors. The Company
amended its agreement with Broderbund in 1998 to provide for the grant of
exclusive rights to these products to Broderbund in consideration of a one-time
royalty payment.
Fashion Trip was jointly developed by ModaCAD and Intel Corporation ("Intel")
pursuant to a development agreement entered into in late 1997. The Sierra
Division of Cendant Software Corporation which was subsequently purchased by
Havas Interactive of France ("Sierra") published the Fashion Trip CD-ROM in the
second half of 1998 and, pursuant to its agreement with the Company, distributes
portions of Fashion Trip as a shrink-wrapped software application through its
distribution channels. Fashion Trip uses the Company's proprietary rendering
technology to allow users to access digital images of merchandise, to mix and
match leading brands, and to see the products on a photo-realistic model in a
3-D environment that can be personalized. Fashion Finder can also make style
proposals incorporating the user's personal choices and tastes in fashion.
ModaCAD has gathered in Fashion Trip content consisting of name fashion brands
in a sophisticated but easy-to-use software environment.
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Internet Applications
The Company launched the initial phase of its e-commerce site as "Gift Finder"
which is located at www.fashiontrip.com, in December 1998. The Company has
expanded this site by launching Styleclick.com at the end of March 1999.
Styleclick.com, code-named fashionfinder, will represent a new generation of
Internet shopping mall and search engine. The Company is positioning
Styleclick.com to be the one-stop consumer web site for visual web-searches for
fashion apparel, accessories, footwear, and home furnishings and decoration
items, as well as for current fashion news.
Styleclick.com intends to aggregate, over time, a large number of Style Industry
vendors, including many vendors whose products are featured in the Company's
consumer software CD-ROM applications. For these vendors, ModaCAD is able to
address the issue of how to build and manage a system that incorporates all of
the components (namely presentation and order fulfillment) needed to enable a
vendor to sell its products through a direct-to-consumer e-commerce channel.
Additionally, the Styleclick.com site will feature a product search engine
capable of finding products in the style category on the Internet in response to
a user inquiry.
Styleclick.com will offer the end-user the ability to search through multiple
manufacturers' inventories in the various search channels, gather visual and
textual information about products, view detailed product information and visual
detail, and purchase merchandise through use of an intelligent style search
engine capable of personalization for each user. Styleclick.com will enable
users to conduct side-by-side comparisons of products from multiple brands, and
it will integrate transactions from multiple vendors.
Additional channels featuring expanded functionality such as home decorating and
cosmetics, are expected to be added later in 1999. There can be no assurance
that the channels will be launched according to this time frame.
Business-to-Business Applications
The Company's CAD software was designed to perform modeling, rendering and
support tasks. The target market for these products is major industrial design
companies. The Company's CAD software is used to model 3-D product
visualizations from simple 2-D images, render a photorealistic picture of
simulated products and place them inside a 3-D space, such as a room interior,
and perform the entire rendering process in real time without the need for
special or customized hardware.
ModaCAD's e-merchandising products allow retailers to cut the time and expense
of product development and production by enabling them to create and manipulate
virtual prototypes of proposed products. This software is used together with
interactive kiosks and other desktop PC-based point-of-sale systems in retail
stores for special order products to allow consumers to visualize, in an
interactive format, special order options (such as fabric styles or finishes)
and preview their "customized" products prior to purchasing. The ability to
create virtual prototypes also reduces inventory costs by presenting "virtual"
samples on a computer screen directly to customers, thereby decreasing the need
to hold extensive inventories of physical products. The Company's products are
also aimed at decreasing the costs of product merchandising, assortment planning
and store design.
Certain of ModaCAD's CAD products and e-merchandising products were sold or
licensed to Lectra in early 1999 as a part of the Company's redirected focus on
the emerging Internet electronic commerce market.
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Business Strategy
Business-to-business applications were previously a major focus of ModaCAD. In
selling or licensing many of its business-to-business applications, ModaCAD
anticipates to free resources that were previously deployed on
business-to-business applications, which will allow it to continue to
aggressively transition into an Internet e-commerce company operating primarily
in the consumer marketplace. ModaCAD's goal is to leverage both its
relationships with retailers and manufacturers and its content search and
visualization technologies to obtain the participation of a broad range of Style
Industry vendors, (retailers and manufacturers) in the Company's Internet
e-commerce initiatives. ModaCAD expects to shift its revenue based increasingly
from licensing of software to revenues shared in connection with transactions
effected on its Internet shopping site.
Consumer software, CD-ROM Applications
Through the development of ModaCAD's CD-ROM applications, ModaCAD has created
business relationships with a variety of prominent retailers and manufacturers.
In addition, the broad distribution of the Company's CD-ROMs has created a
consumer audience for its products and enhanced the Company's name and brand
recognition. The Company plans to continue to develop consumer software and,
over time, it plans to adapt the functionalities of such software to the
Internet. By adapting the CD-ROM applications to the Internet, the Company hopes
to broaden significantly its target audience and facilitate the dissemination of
its technologies. Additionally, many of the core technologies developed for
CD-ROM products have applications to the broad-band Internet market, and the
Company intends to leverage them aggressively as broad-band access to the
Internet emerges. The Company also intends to link consumer CD-ROM products with
ModaCAD's on-line shopping site.
Internet Applications
ModaCAD's new on-line shopping site, which has been launched under the name
Styleclick.com at the end of March, 1999, features a wide variety of vendor's
products which may be viewed and purchased on the site. The Company expects
vendors to benefit from the exposure their products receive to a large on-line
consumer audience and from the order fulfillment and other services offered in
connection with Styleclick.com. ModaCAD will receive revenues from the services
it provides to its vendors, and it will share in the revenues generated from
sales of products and advertising on the site. By outsourcing order fulfillment
services, ModaCAD anticipates to offer an efficient cost structure and avoid the
inventory costs associated with traditional brick-and-mortar retail operations.
The success of ModaCAD's Internet shopping site will depend in large part on the
ability of the Company to solicit vendors who wish to display and sell their
products on the site. Vendor representation on the web-site increases the site's
attractiveness to both consumers, who wish to find a broad assortment of
fashions, and to other potential vendors, who wish to reach a broad consumer
audience and who must meet their competitors' efforts. The Company has already
secured the agreement of a wide assortment of vendors to participate on the
site. The Company believes that it will continue to attract vendors by removing
barriers to entry into the e-commerce arena and providing business solutions to
companies that have no end-user order fulfillment capability; no e-commerce
enabled web-site; no capacity to image or create content for e-commerce
catalogs; no end-user customer service capability; and/or no end-user
transaction capacity.
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Additionally, the success of the Company's shopping site depends on the
Company's execution of an aggressive marketing campaign designed to direct
consumer traffic.
Business-to-Business Applications
In early 1999, ModaCAD entered into an agreement with Lectra, whose parent
company, Lectra Systemes SA, is one of the world's largest suppliers of CAD/CAM
systems to the fashion and home furnishing industries in the Style Industries.
Under the agreement, ModaCAD sold its CAD business-to-business product lines to
Lectra, subject to the rights of RunTime under its distribution agreement in
Europe. The Company also licensed to Lectra its core technology, subject to the
rights of RunTime under its distribution agreement in Europe. The Company
believes that it will benefit from the broad exposure its products will enjoy
due to Lectra's global distribution. The Company also believes that its
arrangement with Lectra will allow it to direct a greater portion of its
resources to the further development and promotion of its consumer software
CD-ROM applications and to its Internet shopping site.
ModaCAD's strategy is to increasingly move all of its business-to-business
technologies to the Internet with a focus on electronic merchandising and
electronic cataloguing. The Company believes this strategy complements ModaCAD's
Internet strategy for the consumer business.
Marketing, Sales and Distribution
The Company employs 33 sales and marketing personnel. The Company maintains, in
addition to its Los Angeles headquarters, an additional sales office in New York
where three members of the sales team are located. An additional sales person is
located in Omaha, Nebraska. Since the middle of 1994, the Company has depended
upon an exclusive arrangement with a European distributor for distribution of
certain of its products in specified European countries.
Consumer Software, CD-ROM Applications
In March 1996, the Company entered into a Software Development and Publishing
Agreement ("the Broderbund Agreement") with Broderbund, under which Broderbund
published the ModaCAD-developed 3D Home Interiors product line, and subsequent
ModaCAD authored 3D Home Series software titles. Broderbund, a division of The
Learning Company, is a leading software publisher and distributor. Broderbund
has distributed and marketed 3D Home Interiors domestically and internationally
to PC hardware and software retailers and resellers, home furnishing and fixture
retailers and home improvement stores. In July 1998, ModaCAD amended its
publishing agreement and provided Broderbund with an exclusive license to the 3D
Home Interiors software application product line in exchange for a one-time
royalty payment. The exclusive terms apply only to certain portions of the
product, and ModaCAD retains ownership of its core visualization and digital
content creation technologies. Broderbund is responsible for marketing and
promotion of the products embodying the technology licensed under the Broderbund
Agreement and for customer support for such products.
In June of 1998, ModaCAD entered into an agreement (the "Sierra Agreement") with
Sierra, a leader in entertainment and educational software. Under the Sierra
Agreement, Sierra is responsible for the publication, marketing, promotion and
distribution in retail channels of Fashion Trip and a follow-on product being
developed by ModaCAD under the Sierra Agreement.
The core technology developed for the CD-ROMs are compatible with the Internet
and provide the Company with a technology platform for emerging broad-band
applications on the Internet. As such broad-band capabilities emerge, the
Company expects to leverage these core technologies as part of its consumer
Internet strategies.
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Internet Applications
The Company plans to market its Internet shopping site to the consumer directly
through direct-to-consumer channels such as the Internet and other on-line
services, print and radio advertising, editorial and cross vendor promotions, as
well as through affiliated sites programs.
Business-to-Business
The Company has traditionally marketed its CAD and electronic merchandising
products both through its direct sales force and through a network of authorized
dealers and distributors. ModaCAD plans to maintain a limited direct sales force
for key customers and major national accounts. In early 1999, the Company
entered into an agreement with Lectra. Under the agreement, Lectra will be
principally responsible for marketing ModaCAD's CAD and electronic merchandising
products and will provide customers with appropriate software for use under
license, advise customers of any computer hardware requirements necessary to
utilize the software, assist customers in the creation of the database of the
customer's products or designs, and provide on-going training and support in the
use of the product.
Competition
The computer software design, e-commerce, and electronic merchandising markets
are intensely competitive and subject to rapidly changing technologies and
evolving product standards. The Company believes that principal competitive
factors in the markets in which the Company competes include product
functionality and ease of use, product performance and reliability, customer
service and support, timeliness of product upgrades, vendor credibility and
brand awareness, technological advantages and price/performance characteristics.
The Company believes that its products compete favorably with the products of
its competitors principally due to the advantages of the Company's imaging
functions, the ease with which the products may be used with existing operating
systems, its relationships with a variety of manufacturers and retailers, and in
the case of its electronic merchandising products, the integration of a digital
database of manufacturers' product catalogs. Although the Company believes that
it competes favorably in the markets it serves, there can be no assurance that
new or established competitors will not offer products superior to, or lower in
price than, those of the Company, or that completely new technologies might be
developed to supplant the technologies currently being used by the Company.
Consumer software, CD-ROM Applications
In the broad computer software design market the Company competes with numerous
companies providing rendering software. The consumer software market is
increasingly competitive, with numerous suppliers directing new products into a
highly differentiated and rapidly developing marketplace. The Company's
competitors in this market include several large companies with substantially
greater financial, technical, marketing and other resources than the Company, as
well as numerous companies of varying sizes and resources, including Mattel/The
Learning Company, and Sierra. Although ModaCAD entered into agreements with The
Learning Company's Broderbund division and Sierra for the 3D Home Interiors
product line and Fashion Trip, respectively, and such agreements contain certain
mutual non-compete covenants, the agreements do not prohibit Broderbund or
Sierra or their parent companies from publishing or distributing similar
products which could compete with the Company's products. Additionally, the
Company expects increased competition from new competitors who may in the future
publish competitive home furnishing, fashion or fashion related software
products. The Company believes that the core visualization technology embodied
in its products constitutes a competitive advantage in the consumer software
market.
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Internet Applications
Recent years have witnessed an increasing number of entrants into the e-commerce
arena, and there are a number of entities whose activities may be directly
competitive with those of ModaCAD. In the apparel industry, a number of
retailers who have traditionally conducted their activities out of
brick-and-mortar premises are transitioning into the e-commerce arena in order
to expand their businesses. The Company believes that such retailers, such as
Lands' End, J. Crew, the Gap, L.L. Bean, Macy's, Bloomingdale's and Eddie Bauer
will not constitute significant competitive pressures on the Company's Internet
shopping site because they seek to use the Internet as an additional
distribution channel, while retaining their emphasis on sales through other
traditional distribution channels. Consequently, the cost structure of these
retailer's products is significantly different than that of ModaCAD. There is no
assurance that these retailers will not alter their strategies and concentrate
more of their resources in developing Internet shopping portals or other sites
or projects that will compete directly with Styleclick.com.
In the Internet e-commerce sector, the Company competes with numerous product
aggregators and style destination sites. Some of these entities offer product
guides, search engine shopping guides and destination shopping sites, and
examples of some such entities are Bluefly.com, Buy.com, Ivillage.com,
Amazon.com, Fashionmall.com, Shopfind.com, Girlshop.com and Shopping.com. Some
of these entities have not targeted the Style Industries, and their current
activities are not directly competitive with those of ModaCAD. However, there is
no assurance that such entities will not change or expand their operations to
include activities that are directly competitive with ModaCAD. Other destination
sites, such as Elle.com, Gurl.com, Cosmopolitan.com which are sponsored by
various fashion and decorating magazines, have targeted the Style Industries.
While such sites often offer superior editorial content, the Company believes
that its technical and logistical infrastructure constitutes a competitive
advantage over such actual and potential competitors. However, there can be no
assurance that such competitors will not be able to overcome the technical and
logistical barriers to entry and, therefore, exert greater competitive pressure
on ModaCAD.
The home furnishing industry is less competitive than the apparel industry.
ModaCAD has not identified any major retailers whose on-line operations are
competitive with ModaCAD's operations, and it believes that it has a first mover
advantage in this industry. While a number of furniture retailers have
established Internet operations in the home decorating segment, these operations
have been limited in scope and have lacked the support of the manufacturing
community. It is possible that one or more of the Internet portals may in time
target the Style Industries and present a competitive threat to ModaCAD. At the
same time, ModaCAD is in active discussion to explore potential relationships
with Internet portals. There are no guarantees that such relationships will come
to fruition, however.
Business-to-Business Applications
The CAD and electronic merchandising market are intensely competitive and
subject to rapidly changing technologies and evolving product standards. In the
broad electronic merchandising markets, the Company competes with numerous
companies providing CAD and rendering software, including companies such as
Lectra Systemes SA, Gerber Garment Technology, Inc., NED Graphics, Info Design,
Intellitek Computer Corporation, and MicroD Inc. Some of the Company's existing
and potential competitors in the software design and electronic merchandising
markets have significantly greater financial, technical, sales and marketing
resources than the Company, have longer operating histories than the Company,
and have better brand name recognition.
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Dependence on Significant Customers
During 1997 and 1998, Broderbund accounted for approximately 7% and 30%,
respectively, of the Company's total revenues. During 1998, Sierra accounted for
approximately 24% of the Company's total revenues. During 1997 and 1998, Intel
accounted for approximately 34% and 6%, respectively, of the Company's total
revenues. During 1997 and 1998, the Company's largest business-to-business
product purchaser, its European distributor, accounted for approximately 8% and
1%, respectively, of the Company's total revenues. With the exception of
Broderbund and the Company's European distributor, the Company may continue to
be dependent on the other two significant customers, the loss of which could
have a material and adverse effect on the Company's business.
Research and Development
ModaCAD believes that its success will depend primarily on its ability to
develop new products, maintain technological competitiveness and fulfill an
expanding range of customer requirements. To date, the Company has designed and
developed all of its key products internally. The Company's research and
development expenditures (including expenses that are required to be capitalized
under FASB 86) totaled $3,000,000 or 67% of revenues in 1997 and $6,592,000 or
99% of revenues in 1998. ModaCAD's primary expenses for research and development
include the personnel costs of the Company's engineers and other specialists in
software infrastructure, interface development, database technologies and 3-D
computer graphic design. Research and development expenses also include the
depreciation and cost of maintenance of computer hardware used in research and
development. As of December 31, 1998, 71 of the Company's 121 full-time
employees were employed in various aspects of research and development
activities. During 1997 and 1998, no significant amount of the Company's
research and development expenditures was customer sponsored.
ModaCAD believes that it has completed most of the development of the core
technologies necessary to deploy Styleclick.com. These core technologies include
the search engine, the data harvesting engine, the visualization engines, the
data streaming engine, and the intelligent shopping agents. Currently the focus
of the Company's product development efforts is centered on the creation of the
user interface for the site, art creation and content acquisition, optimizing
user experience for fast access from low bandwidth Internet access; load
balancing traffic for optimal handling of concurrent transactions; expanding
ModaCAD's content acquisition technology to include higher degrees of
automation; developing data streaming technologies to increase delivery of rich
content through low bandwidth environments; and expanding the intelligent nature
of shopping agents for smart searches and personal advice.
The Company's development teams are continuously working towards new extensions
and enhancements to its core rendering engine in an on-going effort to maintain
and extend its leadership in the area. ModaCAD also maintains research and
development in a variety of advanced technical areas, including object-oriented
technology, data management technology, expert systems and rule-based systems,
rendering and other evolving imaging technologies.
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Patents and Proprietary Rights
The Company holds two United States patents. The first covers the Company's core
rendering and modeling technology. The second covers 3-D modeling techniques.
The Company also has received a notice of allowance of the company's pending
patent application covering the ability to create an interactive digital
dressing room that allows apparel to be fitted to specific body dimensions. In
addition to patent protection, the Company relies on a combination of (i) trade
secret, copyright and trademark laws, (ii) confidentiality and nondisclosure
agreements and (iii) other contractual and technical measures to protect its
proprietary rights. There is no assurance that these measures will deter
misappropriation of the Company's proprietary rights. The Company employs a
"lock and key" system with respect to the proprietary information underlying its
software. This system is designed to ensure that only certain key employees have
access to such information, all of whom have signed confidentiality and
nondisclosure agreements. The Company has nine registered trademarks, including
the mark ModaCAD. The Company believes that its products, trademarks and other
proprietary rights do not infringe on the proprietary rights of third parties.
There can be no assurance, however, that third parties will not assert
infringement claims against the Company in the future with respect to current or
future products or that any such asserted claims may not result in costly
litigation.
Employees
As of December 31, 1998, the Company employed 121 full-time employees, including
33 in sales and marketing, 37 in engineering, 34 in product development, 13 in
administration and four in customer support services. The Company also employs
19 consultants who work in product development. The Company believes that its
future success will depend, in part, on its ability to continue to attract, hire
and retain highly qualified personnel. The competition for such personnel in the
computer software, Internet and e-commerce industries is intense. None of the
Company's employees are represented by a labor union, and the Company has never
experienced a work stoppage. The Company believes that its relations with its
employees are good.
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PART II
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the information
under "Item 7. Financial Statements" and the Company's financial statements and
notes thereto and other financial data included elsewhere herein. Certain
statements under this caption constitute "forward-looking statements" under the
Reform Act which involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in such forward-looking
statements. Factors that could cause actual results to differ materially include
the following: (i) unforeseen technical or other obstacles in the development or
production of the Company's software and Internet products, (ii) customer
acceptance of the new, updated or revised versions of the Company's software and
Internet products, (iii) the Company's ability to produce its products on a
cost-effective and timely basis, and (iv) factors not directly related to the
Company, such as the plans and success of the Company's vendors, competitive
pressures on pricing, market conditions in general, competition, technological
progression, product obsolescence and the changing needs of potential customers
and the Style Industries in general.
General
The Company is in the business of developing, marketing, and supporting Internet
sites, Internet enabled applications and, business and consumer software
products based on its proprietary technology for content management, including
modeling and rendering technology. The Company's products utilize its
proprietary modeling and rendering technology, operate on standard personal
computers running Macintosh or Windows operating systems and are grouped into
three principal product groups: consumer software (including Internet enabled
software applications), Internet applications for e-commerce and
business-to-business applications CAD and electronic merchandising products).
The Company is leveraging its technology to build and deploy Internet sites and
Internet enabled applications, such as comparative search and shopping solutions
aimed at facilitating businesses to use electronic commerce to reach consumers
in the apparel, footwear, accessories and cosmetics industries.
The Company's electronic merchandising products are used principally by
industrial designers to model three-dimensional objects from two-dimensional
images and to render such objects in real time with photo realistic imagery.
These products combine the Company's technology with digital product catalogs
produced by the Company or by product manufacturers.
In May 1999, the Company changed its method of recognizing income from barter
transactions during 1998 and restated its financial statements as of and for the
year ended December 31, 1998. The restatement reduces net sales by $1.1 million,
increases the net loss by $1.1 million and reduces assets by $1.1 million.
10
<PAGE>
Results of Operations
The following table sets forth selected items from the Company's statement of
operations (in thousands) for the years ended 1998 and 1997 and the percentages
that such items bear to net sales:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1998 1997
------------------- ------------------
(As Restated)
<S> <C> <C> <C> <C>
Net sales $ 6,681 100.0% $ 4,450 100.0%
Cost of sales 82 1.2 87 1.9
Selling, general and administrative 8,291 124.1 3,394 76.3
Research and development 3,541 53.0 172 3.9
Amortization of software development costs 4,890 73.2 774 17.4
-------- ----- --------- -----
Total expenses 16,804 251.5 4,427 99.5
-------- ----- --------- -----
Income (loss) from operations (10,123) (151.5) 23 0.5
Investment income 435 6.5 331 7.5
-------- ----- --------- -----
Net income (loss) $ (9,688) (145.0%) $ 354 8.0%
======== ===== ========= =====
</TABLE>
1998 Compared with 1997
Net Sales
Net sales increased $2,231,000, or 50%, to $6,681,000 in 1998 from $4,450,000 in
1997. The increase was primarily due to (i) an increase in the sales of the
Company's consumer products, (ii) receipt by the Company of a one-time royalty
payment for the exclusive license of certain of its consumer software products,
(iii) a $5,000 revenue increase from training services, and (iv) a $71,000
revenue increase from maintenance fees. The revenue increases were offset by a
$887,000 decrease in sales of the Company's business-to-business products and a
$131,000 decrease in consulting services revenues.
Sales of business-to-business products decreased $887,000, or 39%, to $1,398,000
in 1998 from $2,285,000 in 1997 primarily due to $400,000 in the foreign sales
generated by two of the Company's major customers in Europe in 1997, which sales
were not repeated in 1998. The remaining decrease resulted from the Company's
change of its primary business focus from the business-to-business marketplace
to the emerging consumer Internet electronic commerce market.
Revenue generated from consumer products increased $3,173,000 or 176%, to
$4,975,000 in 1998 from $1,802,000 in 1997. The increase was primarily due to
(i) $1,980,000 of revenue generated from the exclusive license of the Company's
3D Home Interiors product to its publisher, and (ii) $2,995,000 of revenue
generated in connection with the Company's two newly developing e-commerce
projects in 1998. No such revenues were generated in 1997. The increase was
offset by a total of $1,802,000 revenues generated in 1997 which were not
repeated in 1998, including (i) a one-time payment of $1,500,000 in connection
with the Company's fulfillment of certain obligations under an agreement with
Intel in connection with the co-development of consumer software; (ii) $181,000
royalty income in connection with the 3D Home Interiors product, and (iii) a
one-time payment of $121,000 for consulting services rendered by the Company in
connection with its consumer products.
Consulting services decreased by $131,000, or 96%, to $5,000 in 1998 from
$136,000 in 1997 primarily due to $136,000 revenue generated in connection with
the software consulting services provided to the Company's customers in
conjunction with the sale of business-to-business products and a one-time
consulting service fee generated in connection with one of the Company's
customer's annual conference meeting in 1997. Such consulting services were not
repeated in 1998. Consulting services are performed by the Company from time to
time and the fees therefore do not constitute a steady income stream for the
Company.
11
<PAGE>
Training services revenue increased by $5,000, or 7%, to $74,000 in 1998 from
$69,000 in 1997 primarily due to services agreed to be provided by the Company
in connection with its new business-to-business product line in 1998. Net sales
resulting from product maintenance fees increased $71,000 in 1998 over 1997.
Cost of Sales
Cost of sales decreased $5,000, or 6%, to $82,000 in 1998 from $87,000 in 1997.
This decrease reflected the sales decrease in business-to-business products from
1997 to 1998. Cost of sales associated with the Company's consumer products does
not have a major impact on the total cost of sales since an insignificant amount
of cost of sales was incurred in connection with the consumer products in 1998
and no such cost of sales was incurred in 1997.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $4,897,000, or 144%, to
$8,291,000 in 1998 from $3,394,000 in 1997. Personnel costs increased
$1,218,000, or 78%, to $2,791,000 in 1998 from $1,573,000 in 1997. The increase
in personnel costs resulted from the hiring of additional personnel in late 1997
and 1998 to support the Company's increased operating activities, increasing the
total number of employees from 86 as of December 31, 1997 to 121 as of December
31, 1998. Additionally, certain related costs including travel, marketing,
telephone, office supplies expenses, taxes and licenses, repair and maintenance
and depreciation expense increased $2,253,000, or 180%, to $3,505,000 in 1998
from $1,252,000 in 1997. $1,420,000 of such increase was related to the
Company's increasing marketing activities in 1998 to support its new e-commerce
products. Also, professional services including accounting, legal and consulting
services increased $477,000, or 108%, to $919,000 in 1998 from $442,000 in 1997.
The increase in professional services was primarily due to the Company's
increased requirements for these services in 1998 compared to 1997 resulting
from the Company's increased operating activities. Further, rent and lease
expense increased $84,000, or 115%, to $157,000 in 1998 from $73,000 in 1997
resulting from the Company's relocation to a larger facility in March 1998.
Finally, bad debt expense increased $865,000, or 1,663%, to $917,000 in 1998
from $52,000 in 1997 due to the Company's decision in 1998 to increase its bad
debt reserve by $865,000 due to the Company's increasing sales volume, and based
on a review of specific international as well as business-to-business accounts.
Research and Development
The Company incurred $6,592,000 of research and development costs in 1998, as
compared to $3,000,000 in 1997. In 1997, $3,051,000 of such costs were
capitalized as software development costs, while in 1998, $2,828,000 of such
costs were capitalized as software development costs. The remaining $3,541,000
of research and development costs in 1998 were expensed, compared to $172,000 in
1997. The 102% increase in research and development expenditure from 1997 to
1998 was primarily due to the hiring of additional personnel to perform software
programming services in connection with the further development of the Company's
business-to-business, consumer and Internet products. A lower percentage of
research and development expenditures were capitalized in 1998 as compared to
1997 due primarily to the Company's completion of 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 those two major projects was
capitalized as software development costs.
12
<PAGE>
Amortization of Software Development Costs
The amortization of software development costs increased $4,116,000, or 532%, to
$4,890,000 in 1998 from $774,000 in 1997 partially because the Company began
marketing (and amortizing development costs associated with) several new
versions of software products in late 1997 and in 1998. In addition, the Company
took a one-time charge to write off a total of $3,443,000 of its research and
development cost in 1998. $1,038,000 of the total write-off was related to the
exclusive license of the Company's 3D Home Interiors product to its Company's
publisher. The remaining $2,405,000 write-off was primarily attributable to the
software capitalized prior to 1998 in relation to certain products in the
business-to-business market place which the Company is exiting as a result of
its new business strategy to target the emerging e-commerce market.
Investment Income
Investment income increased $104,000, or 31%, to $435,000 in 1998 from $331,000
in 1997. This increase is due to the increase in income generated from a money
market account in which the proceeds received in July 1997 upon the exercise by
warrant holders of the Company's public warrants after notice of redemption was
given in June 1997, along with other amounts, are maintained. The increase was
offset by a $55,000 decrease resulting from a loss on the Company's equity
investment in 1998.
Income Taxes
The Company recorded no provision for income taxes in 1997 due to the
utilization of net operating loss carryforwards.
Liquidity and Capital Resources
The Company's accounts receivable balance decreased $1,358,000, or 61%, to
$885,000 at December 31, 1998 from $2,243,000 at December 31, 1997. The decrease
was primarily due to the Company's collection of certain major receivable
balances toward the end of 1998.
On June 19, 1997, upon meeting the requisite criteria for redemption of
redeemable common stock purchase warrants issued in the Company's IPO (i.e. the
closing bid price for the Company's common stock averaged in excess of $7.50 for
a period of 20 consecutive trading days ending within 15 days of the notice of
redemption), the Company notified the holders of the publicly traded warrants
that it intended to redeem any unexercised warrants outstanding on July 29,
1997. As a result of the notification, the warrant holders exercised warrants to
purchase 1,609,084 shares of the Company's common stock for an aggregate
exercise price of $10,459,046, and the Company redeemed the remaining 916
unexercised warrants for $9.
In connection with loans made to the Company by a third party in December 1995
and January 1996, the Company granted such third-party lender warrants to
purchase an aggregate of 200,000 units which warrants had a two-year term, each
with an exercise price of $4.00 per unit. Each warrant provided the holder with
the right to purchase one unit, comprised 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 beginning March
27, 1996. In 1997, the warrant holder (or its transferees) exercised warrants to
purchase 200,000 units for an exercise price of $800,000. The warrant holder
further exercised his redeemable common stock purchase warrants to purchase
200,000 shares of common stock for an exercise price of $1,300,000.
13
<PAGE>
In connection with the Company's 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 the
Company's 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. In 1997, 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 for an aggregate exercise
price of $529,800. The underwriter (or its assignees) further exercised
redeemable common stock purchase warrants to purchase 30,800 shares of the
Company's common stock for $280,280. In 1998, the underwriter (or its assignees)
exercised a portion of its warrants to purchase an aggregate of 26,400 shares of
the Company's common stock and 26,400 redeemable common stock purchase warrants
for $158,400.
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 April 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. In 1997, nine of the Company's
employees exercised their stock options to purchase a total of 29,000 shares of
the Company's common stock for a cumulative purchase price of $149,375. In 1998,
18 of the Company's employees exercised their stock options to purchase a total
of 94,000 shares of the Company's common stock for a cumulative purchase price
of $837,875.
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 (8.5% per annum at the time the
agreement was signed). Terms of the agreement require the Company to maintain
certain minimum financial ratios which, as of December 31, 1998, the Company has
met. As of December 31, 1998, the Company has not drawn any amounts against the
line of credit.
The Company anticipates using its capital primarily to shift its focus to the
e-commerce market, and to fund activities related to the design, development,
marketing, sales and support of the Company's new and existing products.
Together with its existing capital received (i) in connection with the exercise
of warrants after the Company gave notice of the redemption of its warrants,
(ii) in the form of a one-time royalty payment in connection with its license of
its software product in 1998, and (iii) in the form of proceeds from the sale of
its major business-to-business products in the first quarter of 1999, as well as
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 12 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, if an attractive
opportunity to raise capital arises, or if the Company's need for capital occurs
sooner than the Company projects, it may have to sell additional equity or debt
securities or obtain other credit facilities (in addition to the line of credit
agreement into which the Company entered in October 1998), assuming it can do so
on acceptable terms.
14
<PAGE>
Item 7. Financial Statements
MODACAD, INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
15
<PAGE>
MODACAD, INC
CONTENTS
December 31, 1998
===============================================================================
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 17
FINANCIAL STATEMENTS
Balance Sheet 18
Statements of Operations 19
Statements of Stockholders' Equity 20
Statements of Cash Flows 21 - 22
Notes to Financial Statements 23 - 37
16
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
ModaCAD, Inc.
We have audited the accompanying balance sheet of ModaCAD, Inc. as of December
31, 1998 (as restated), and the related statements of operations, stockholders'
equity and cash flows for each of the two years in the period ended December 31,
1998 (as restated). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 11 to the financial statements, the Company changed its
method of recognizing income from barter transactions for the year ended
December 31, 1998.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ModaCAD, Inc. as of December
31, 1998, and the results of its operations and its cash flows for each of the
two years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
March 16, 1999 (Except for
Note 11, as to which the
date is May 19, 1999)
17
<PAGE>
MODACAD, INC.
BALANCE SHEET
December 31, 1998
(As Restated)
================================================================================
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets
Cash and cash equivalents $ 6,343,599
Accounts receivable, net of allowance for doubtful accounts
of $132,500 752,487
Prepaid expenses and other current assets 397,101
------------
Total current assets 7,493,187
Capitalized computer software development costs,
net of accumulated amortization of $6,039,105 3,014,043
Furniture and equipment, net of accumulated depreciation 2,459,656
of $1,069,832
Other assets 83,055
------------
Total assets $13,049,941
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 503,198
Deferred income 237,052
------------
Total current liabilities 740,250
------------
Commitments
Stockholders' equity
Common stock, no par value
15,000,000 shares authorized
6,143,374 shares issued and outstanding 26,575,627
Accumulated deficit (14,265,936)
------------
Total stockholders' equity 12,309,691
------------
Total liabilities and stockholders' equity $13,049,941
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
MODACAD, INC.
STATEMENTS OF OPERATIONS
For the Years Ended December 31,
================================================================================
<TABLE>
<CAPTION>
1998 1997
------------ ------------
(As Restated)
<S> <C> <C>
Net sales $ 6,681,280 $ 4,449,857
------------ ------------
Expenses
Cost of sales 82,135 87,470
Selling, general, and administrative 8,290,979 3,393,765
Research and development 3,541,300 171,769
Amortization of capitalized software
development costs 4,889,986 774,135
------------ ------------
Total expenses 16,804,400 4,427,139
------------ ------------
Income (loss) from operations (10,123,120) 22,718
Other income (expense)
Loss in equity investment (55,324) -
Other income 2,067 11,190
Investment income 488,738 320,367
------------ ------------
Total other income (expense) 435,481 331,557
Net income (loss) $(9,687,639) $ 354,275
============ ============
Basic earnings (loss) per share $ (1.59) $ 0.07
============ ============
Diluted earnings (loss) per share $ (1.59) $ 0.06
============ ============
Weighted-average shares outstanding 6,088,247 4,800,918
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
MODACAD, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31,
================================================================================
<TABLE>
<CAPTION>
Common Stock Accumulated
Shares Amount Deficit Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 3,865,790 $11,593,905 $ (4,932,572) $ 6,661,333
Common stock issued for
Stock options exercised 29,000 149,376 149,376
Warrants exercised 2,128,184 13,369,126 13,369,126
Warrant redemption cost (167,055) (167,055)
Issuance of warrants for
services 572,000 572,000
Net income 354,275 354,275
------------ ------------ ------------ ------------
Balance, December 31, 1997 6,022,974 25,517,352 (4,578,297) 20,939,055
Common stock issued for
Stock options exercised 94,000 837,875 837,875
Warrants exercised 26,400 158,400 158,400
Issuance of warrants for
services 62,000 62,000
Net loss (As Restated) (9,687,639) (9,687,639)
------------ ------------ ------------ ------------
Balance, December 31, 1998
(As Restated) 6,143,374 $26,575,627 $(14,265,936) $12,309,691
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
MODACAD, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
================================================================================
<TABLE>
<CAPTION>
1998 1997
------------ ------------
(As Restated)
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $(9,687,639) $ 354,275
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities
Depreciation 292,671 65,665
Amortization of capitalized
software development costs 4,889,986 774,135
Provision for loss on accounts
receivable - 52,000
Issuance of warrants for
services rendered 62,000 12,000
Furniture and equipment acquired
in exchange for sales (275,000) -
Loss in equity investment 55,324 -
(Increase) decrease in
Accounts receivable 1,408,665 (870,299)
Prepaid expenses and
other current assets 350,675 (34,343)
Other assets 8,593 (69,208)
Increase (decrease) in
Accounts payable and accrued expenses 142,477 (10,022)
Deferred income 132,772 29,501
Net cash provided by (used in) ------------ ------------
operating activities (2,619,476) 303,704
------------ ------------
Cash flows from investing activities
Purchase of furniture and equipment (1,557,680) (616,166)
Capitalized computer software development cost (2,895,512) (2,682,956)
------------ ------------
Net cash used in investing activities (4,453,192) (3,299,122)
------------ ------------
Cash flows from financing activities
Payments on officers/stockholders note payable - (75,000)
Stock options exercised 837,875 149,376
Warrants exercised 158,400 13,369,126
Warrant redemption cost - (167,055)
------------ ------------
Net cash provided by financing activities 996,275 13,276,447
------------ ------------
Net increase (decrease) in cash and cash
equivalents (6,076,393) 10,281,029
Cash and cash equivalents, beginning of year 12,419,992 2,138,963
------------ ------------
Cash and cash equivalents, end of year $ 6,343,599 $12,419,992
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
MODACAD, INC.
STATEMENTS OF CASH FLOWS (Continued)
For the Years Ended December 31,
================================================================================
Supplement disclosures of cash flow information
During the years ended December 31, 1998 and 1997, the Company paid no income
taxes or interest.
Supplemental schedule of non-cash investing and financing activities
During the year ended December 31, 1997, the Company issued 126,316 warrants
valued at $560,000 for development expenses that were performed in 1998.
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
MODACAD, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
================================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Line of Business
ModaCAD, Inc. (the "Company") was incorporated in California on February 4,
1988. The Company is a developer and provider of technologies and digital
content for electronic merchandising in the fashion, accessories, footwear,
cosmetics, home furnishing, decorating and improvement industries.
Cash and Cash Equivalents
For purpose of the statements of cash flows, the Company considers all
highly-liquid investments purchased with original maturities of three months or
less to be cash equivalents. As of December 31, 1998, the cash and cash
equivalents included amounts held in a checking and a money market account of
approximately $315,229 and $6,026,869, respectively.
Software Development Costs
Software development costs are capitalized in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Cost of
Computer Software to Be Sold, Leased, or Otherwise Marketed." Capitalization of
software development costs begins upon the establishment of technological
feasibility and is discontinued when the product is available for sale. The
establishment of technological feasibility and the ongoing assessment for
recoverability of capitalized software development costs require considerable
judgment by management with respect to certain external factors, including, but
not limited to, technological feasibility, anticipated future gross revenues,
estimated economic life, and changes in software and hardware technologies.
Capitalized software development costs are comprised primarily of direct
overhead, payroll costs, and consultants' fees of individuals working directly
on the development of specific software products.
Amortization of capitalized software development costs is provided on a
product-by-product basis on the straight-line method over the estimated economic
life of the products (not to exceed three years). Management periodically
compares estimated net realizable value by product to the amount of software
development costs capitalized for that product to ensure the amount capitalized
is not in excess of the amount to be recovered through revenues. Any such excess
of capitalized software development costs over expected net realizable value is
expensed at that time.
Furniture and Equipment
Furniture and equipment are recorded at cost. Depreciation and amortization are
provided using the straight-line method over an estimated useful life of five
years. Maintenance and minor replacements are charged to expenses as incurred.
Gains and losses on disposals of furniture and equipment are included in the
results of operations.
23
<PAGE>
MODACAD, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
================================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Joint Venture Investment and Advances
The Company had a 40% interest in ModaMAGIC, Inc.("ModaMAGIC"). ModaMAGIC was
formed to produce an interactive, multi-media CD-ROM for the consumer market.
During the year ended December 31, 1998, ModaMAGIC was incorporated into a newly
developed project and was written-off as a loss in equity investment.
Revenue Recognition
The Company recognizes revenues related to software licenses and software
maintenance in compliance with the American Institute of Certified Public
Accountants ("AICPA") Statement of Position No. 97-2, "Software Revenue
Recognition." Product revenue is recorded at the time of shipment, net of
estimated allowances and returns. Any insignificant post-contract support
obligations are accrued for at the time of the sale. Post contract customer
support ("PCS") that is bundled with an initial licensing fee and is for one
year or less is recognized at the time of the initial licensing, if
collectability of the resulting receivables is probable. When a PCS is sold
under a separate agreement, the revenue is recognized on a straight-line basis
over the life of the PCS agreement, generally twelve months.
Research and Development Costs
Research and development costs are charged to expense as incurred. These costs
consist primarily of salaries, consulting fees, and direct overhead.
Income Taxes
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and deferred tax liabilities
are recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
Earnings (Loss) Per Share
For the year ended December 31, 1998, the Company adopted SFAS No. 128,
"Earnings per Share." Basic earnings per share is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding. Diluted earnings per share is computed similar to basic earnings
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.
For the year ended December 31, 1998, the Company incurred a net loss;
therefore, basic and diluted loss per share are the same.
24
<PAGE>
MODACAD, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
================================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements, as
well as the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company measures its financial assets and liabilities in accordance with
generally accepted accounting principles. For certain of the Company's financial
instruments, including cash and cash equivalents, accounts receivable, and
accounts payable and accrued expenses, the carrying amounts approximate fair
value due to their short maturities.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist of cash and trade receivables. The Company places its cash
with high quality financial institutions, and at times it may exceed the FDIC
$100,000 insurance limit. The Company sells products on a worldwide basis and
extends credit based on an evaluation of the customer's financial condition,
generally without requiring collateral. Exposure to losses on receivables is
principally dependent on each customer's financial condition. The Company
monitors its exposure for credit losses and maintains allowances for anticipated
losses. As of December 31, 1998, uninsured portions held at banks were $460,000.
In addition, amounts of $6,026,869 held in a money market account are fully
insured.
Comprehensive Income
For the year ended December 31, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." This statement 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 financials statements since the Company did not have any of the items
of comprehensive income in any period presented.
Recently Issued Accounting Pronouncements
In February 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 132, "Employers' Disclosures about Pensions and Other Post-Retirement
Benefits." The Company does not expect adoption of SFAS No. 132 to have a
material impact, if any, on its financial position or results of operations.
25
<PAGE>
MODACAD, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
================================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Accounting Pronouncements (Continued)
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," is
effective for financial statements with fiscal years beginning after June 15,
1999. SFAS No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The Company does not expect adoption of
SFAS No. 133 to have a material effect, if any, on its financial position or
results of operations.
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise," is effective for financial statements with the first fiscal quarter
beginning after December 15, 1998. The Company does not expect adoption of SFAS
No. 134 to have a material effect, if any, on its financial position or results
of operations.
SFAS No. 135, "Rescission of FASB Statement No. 75 and Technical Corrections,"
is effective for financial statements with fiscal years beginning February 1999.
This statement is not applicable to the Company.
NOTE 2 - FURNITURE AND EQUIPMENT
Furniture and equipment at December 31, 1998 consisted of the following:
Office equipment $ 233,652
Computer equipment and software 2,607,578
Furniture and fixtures 255,510
Leasehold improvements 432,748
------------
3,529,488
Less accumulated depreciation 1,069,832
------------
Total $ 2,459,656
============
Depreciation expense for the years ended December 31, 1998 and 1997 was $447,628
and $210,712, respectively, of which $154,957 and $145,047, respectively, were
capitalized as software development costs.
26
<PAGE>
MODACAD, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
================================================================================
NOTE 3 - COMMITMENTS
Leases
The Company leases certain facilities for its corporate and operations offices
under long-term, non-cancelable operating lease agreements that expire through
April 30, 2006.
Future minimum aggregate lease payments under non-cancelable operating leases
with initial or remaining terms of one year or more at December 31, 1998 were as
follows:
Years Ending
December 31,
--------------
1999 $ 399,313
2000 395,563
2001 411,712
2002 437,326
2003 463,548
Thereafter 1,064,963
-------------
Total $ 3,172,425
=============
Rent expense for the years ended December 31, 1998 and 1997 was approximately
$451,253 and $192,000, respectively, of which $135,121 and $120,000,
respectively, were capitalized as software development costs.
Employment Agreements
During the year ended December 31, 1998, the Company entered into two new
employment agreements, expiring on December 31, 2005, with certain key officers
of the Company. These officers will 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 for each calendar year of the
employment term in an amount to be determined by the Compensation Committee of
the Board. As of December 31, 1998, the Company has accrued $0 for these
bonuses.
27
<PAGE>
MODACAD, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
================================================================================
NOTE 3 - COMMITMENTS (Continued)
Employment Agreements (Continued)
In connection with the employment agreements, the same key officers were granted
a five-year option to purchase up to an aggregate 400,000 shares of the
Company's common stock. A portion of the options vest and become exercisable if
the market value of the Company's common stock is greater than $10 per share for
any 20 consecutive trading days during any fiscal year. The portion of options
that become exercisable are 50 shares of common stock for each $1,000 of net
income before taxes and executive bonuses in that fiscal year. These options
will be exercisable at a price equal to the market value per share as of the
date of the grant. 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.
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 (8.5% at December 31,
1998). Terms of the agreement require the Company to maintain certain minimum
financial ratios. The Company is in compliance with those financial ratios. As
of December 31, 1998, no amounts have been drawn against the line of credit.
NOTE 4 - STOCKHOLDERS' EQUITY
Sale of Common Stock
In 1996, the Company completed an initial public offering ("IPO") of its common
stock. The offering consisted of 1,400,000 units at $5.01 per unit, each unit
consisting of one share of common stock and one redeemable common stock purchase
warrant. The 1,400,000 warrants have an exercise price of $6.50 per share and
expire in March 2001.
On June 19, 1997, upon meeting the requisite criteria for redemption of
redeemable common stock purchase warrants issued in the Company's 1996 IPO
(i.e., the closing bid price for the Company's common stock averaged in excess
of $7.50 for a period of 20 consecutive trading days ending within 15 days of
the notice of redemption), the Company notified the holders of the publicly
traded warrants that it intended to redeem any unexercised warrants outstanding
on July 29, 1997. As a result of the notification, the warrant holders exercised
warrants to purchase 1,609,084 shares of the Company's common stock for an
aggregate exercise price of $10,459,046, and the Company redeemed the remaining
916 unexercised warrants for $9.
28
<PAGE>
MODACAD, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
================================================================================
NOTE 4 - STOCKHOLDERS' EQUITY (Continued)
Sale of Common Stock (Continued)
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. In 1997, 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 for an aggregate exercise price of $529,800. The underwriter
(or its assignees) further exercised redeemable common stock purchase warrants
to purchase 30,800 shares of the Company's common stock for $280,280. During the
year ended December 31, 1998, the underwriter further exercised redeemable
common stock purchase warrants to purchase an aggregate of 26,400 shares of the
Company's common stock for $158,400.
In connection with loans made to the Company by a third party in December 1995
and January 1996, the Company granted such third-party lender warrants to
purchase an aggregate of 200,000 units which warrants had a two-year term, each
with an exercise price of $4.00 per unit. Each warrant provided the holder with
the right to purchase one unit, comprised 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 beginning March
27, 1996. In 1997, the warrant holder exercised warrants to purchase 200,000
units for an exercise price of $800,000. The warrant holder further exercised
his redeemable common stock purchase warrants to purchase 200,000 shares of
common stock for an exercise price of $1,300,000.
Warrants
In December 1996, the Company issued a warrant to purchase 250,000 shares of
common stock to an outside consultant that are exercisable at a price of $5.00
per share, expiring in December 1999. In accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company has valued these warrants
at the current market value of the services to be rendered by the warrant
holder. For the years ended December 31, 1998 and 1997, the Company has
recognized $5,000 and $12,000, respectively, of consulting expense related to
these warrants. As of December 31, 1998, these warrants have not been exercised.
29
<PAGE>
MODACAD, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
================================================================================
NOTE 4 - STOCKHOLDERS' EQUITY (Continued)
Warrants (Continued)
During the year ended December 31, 1997, the Company entered into a financial
advisory agreement. Under the agreement, the Company issued a warrant to
purchase 100,000 shares of common stock at an exercise price of $14.38 per share
for services to be provided to the Company under this agreement, expiring in
July 2002. The Company has valued these warrants in accordance with SFAS No.
123. For the year ended December 31, 1998, the Company has recognized $36,000 of
consulting expense related to these warrants. As of December 31, 1998, these
warrants have not been exercised.
During the year ended December 31, 1997, the Company entered into a distribution
and development agreement. Under the agreement, the Company issued a warrant to
purchase 126,316 shares of common stock at an exercise price of $19.00 for
services to be provided to the Company under this agreement, expiring in
November 2002. In accordance with SFAS No. 123, the Company has valued these
warrants at the current market value of the services to be rendered by the
warrant holder. As of December 31, 1997, the Company had recorded a prepaid
expense of $560,000 for services to be rendered in 1998. The prepaid expense was
charged to operations in 1998. As of December 31, 1998, these warrants have not
been exercised.
During the year ended December 31, 1998, the Company issued a warrant to
purchase 50,000 shares of common stock to an outside promotion agency that are
exercisable at a price of $17.75 per share, expiring in May 2003. The Company
further issued an additional 8,333 common stock warrants at an exercise price of
$20.00 per share, expiring in November 2003. In accordance with SFAS No. 123,
the Company has valued these warrants at the current market value of the
services to be rendered by the warrant holder. For the year ended December 31,
1998, the Company has recognized $21,000 of promotional expense related to these
warrants. As of December 31, 1998, these warrants have not been exercised.
During the years ended December 31, 1998, 1997, and 1996, the Company issued
warrants to purchase an aggregate 18,000, 12,000, and 2,000, respectively,
shares of common stock to directors of the Company expiring on various dates
through October 2008. In October 1998, the Company repriced the warrants to
$9.50 per share. As of December 31, 1998, these warrants have not been
exercised.
30
<PAGE>
MODACAD, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
================================================================================
NOTE 4 - 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 stockholder
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. In April 1998, the Plan was further amended and approved by
the stockholders in June 1998 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.
During the year ended December 31, 1998, outstanding options granted to
employees in 1997 were repriced in December 1998. Per SFAS No. 123, the Company
should incur additional compensation cost for the excess of the fair value of
the modified options issued over the value of the original options at the date
of the exchange. The Company thus added that incremental amount to the remaining
unrecognized compensation cost for the original options at the December 31, 1998
pro forma disclosure and recognized the total amount over the remaining years of
the remaining life of the options. The remaining expected life of the options is
four years at December 31, 1998.
The Company has adopted only the disclosure provisions of SFAS No. 123. It
applies Accounting Principles Bulletin ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its
plans and does not recognize compensation expense for its stock-based
compensation plans other than for restricted stock and options/warrants issued
to outside third parties. If the Company had elected to recognize compensation
expense based upon the fair value at the grant date for awards under its plan
consistent with the methodology prescribed by SFAS No. 123, the Company's net
income (loss) and earnings (loss) per share would be reduced to the pro forma
amounts indicated below for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
Net income (loss)
<S> <C> <C>
As reported $ (9,687,639) $ 354,275
Pro forma $(15,251,331) $ (1,365,274)
Basic earnings (loss)
per common share
As reported $ (1.59) $ 0.07
Pro forma $ (2.51) $ (0.28)
</TABLE>
31
<PAGE>
MODACAD, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
================================================================================
NOTE 4 - STOCKHOLDERS' EQUITY (Continued)
Stock Option Plan (Continued)
These pro forma amounts may not be representative of future disclosures because
they do not take into effect pro forma compensation expense related to grants
made before 1995. The fair value of these options was estimated at the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for the years ended December 31, 1998 and 1997:
dividend yields of 0% and 0%, respectively; expected volatility of 80% and 65%,
respectively; risk-free interest rates of 4.8% and 5.7%, respectively; and
expected lives of 4.7 and 4.1 years, respectively. The weighted-average fair
value of options granted during the years ended December 31, 1998 and 1997 was
as follows:
1998 1997
------- -------
Exercise price exceeds grant date market price $ 5.96 $ 7.55
Exercise price equal to grant date market price $ 10.83 $ 4.23
Exercise price less than grant date market price $ 10.77 $ 9.76
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
32
<PAGE>
MODACAD, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
================================================================================
NOTE 4 - STOCKHOLDERS' EQUITY (Continued)
Stock Option Plan (Continued)
The following summarizes the stock options transactions under the stock option
plan:
<TABLE>
<CAPTION>
Weighted- Weighted-
Average Average
Stock Options Exercise Other Exercise
Outstanding Price Warrants Price
------------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Balance, December 31,
1996 204,000 $ 4.96 2,202,000 $ 6.07
Granted 733,454 $ 16.29 528,616 $ 11.58
Exercised (29,000) $ 5.15 (2,128,184) $ 6.28
Canceled (6,000) $ 9.50 (916) $ 6.50
------------- ----------
Balance, December 31,
1997 902,454 $ 14.10 601,516 $ 10.16
Granted 840,000 $ 8.92 100,733 $ 13.47
Exercised (94,000) $ 6.03 (26,400) $ 6.00
Canceled (181,000) $ 15.70 - -
------------- ----------
Outstanding, December
31, 1998 1,467,454 $ 11.47 675,849 $ 10.99
============= ==========
Exercisable, December
31, 1998 467,454 $ 10.12 659,849 $ 11.03
============= ==========
The weighted-average remaining contractual lives of the options and warrants are
9.2 and 3.3 years, respectively, at December 31, 1998.
</TABLE>
NOTE 5 - SALES
Major Customers
During the year ended December 31, 1998, the Company did business with two
customers whose sales comprised approximately 30% and 24% of net sales.
During the year ended December 31, 1997, the Company did business with one
customer whose sales comprised approximately 34% of net sales.
Export Sales
For the year ended December 31, 1998, the Company had export sales of
approximately $627,422, principally comprised of $586,725 in Europe and $40,697
in other geographic regions.
33
<PAGE>
MODACAD, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
================================================================================
NOTE 5 - SALES (Continued)
Export Sales (Continued)
For the year ended December 31, 1997, the Company had export sales of
approximately $957,000, principally comprised of $761,000 in Europe, $91,000 in
Asia, and $105,000 in other geographic regions.
NOTE 6 - PROFIT SHARING
In 1996, the Company adopted the ModaCAD 401(k) Plan (the "Plan"). The Plan is
available to substantially all employees who meet length and service
requirements. On September 1, 1996, all permanent and full-time employees of the
Company became participants. Participants may elect to contribute not less than
3% and no more than 15% of their annual compensation. The Plan has a Company
discretionary profit sharing provision which the Company, for years with income
before taxes, will contribute from 0% to 5% of income before taxes. The amount
of the profit sharing contribution will be determined each year by the Company.
For the years ended December 31, 1998 and 1997, employer contributions under the
Plan were approximately $0 and $22,000, respectively.
NOTE 7 - INCOME TAXES
A reconciliation of the provision for income tax expense with the expected
income tax computed by applying the federal statutory income tax rate to income
before provision for income taxes at December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
Income tax computed at federal statutory tax rate 34.0% 34.0%
State taxes (net of federal benefit) 6.3 6.3
Utilization of net operating loss carryforwards (40.3) (40.3)
----- -----
Total -% -%
===== =====
</TABLE>
As of December 31, 1998, the Company has federal net operating loss
carryforwards of approximately $13,431,000 which expire through 2018.
34
<PAGE>
MODACAD, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
================================================================================
NOTE 7 - INCOME TAXES (Continued)
Significant components of the Company's deferred tax liabilities and assets for
federal income taxes consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets
Net operating loss carryforwards $ 4,994,410
Capitalized research and development cost for tax 133,861
Research credits 798,565
Other 96,037
-----------
6,022,873
Valuation allowance for deferred tax assets 5,748,785
-----------
274,088
Deferred tax liabilities
Furniture and equipment (109,942)
Deferred state taxe (164,146)
-----------
Net deferred tax asset $ -
===========
</TABLE>
At December 31, 1998, the Company has provided a valuation allowance for the
deferred tax asset since management has not been able to determine that the
realization of that asset is more likely than not.
The net change in the valuation allowance for the year ended December 31, 1998
was an increase of $3,920,450.
35
<PAGE>
MODACAD, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
================================================================================
NOTE 8 - EARNINGS PER SHARE
Earnings per share for the year ended December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Earnings Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic earnings per share
Earnings available to common
stockholders $ 354,275 4,800,918 $ 0.07
Effect of dilutive securities
Options and warrants - 706,664
---------- ---------
Diluted earnings per share
Earnings available to common
stockholders plus
assumed conversions $ 354,275 5,507,582 $ 0.06
========== ==========
</TABLE>
NOTE 9 - YEAR 2000 ISSUE
The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the Year 2000 Issue.
The Issue is whether computer systems will properly recognize date-sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. The Company is dependent on computer processing in the conduct of its
business activities.
Based on the comprehensive review of the computer systems, management has
determined that the Company's computer systems will not be materially affected
and does not believe the cost of implementation will be material to the
Company's financial position and results of operations.
36
<PAGE>
MODACAD, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
================================================================================
NOTE 10 - SUBSEQUENT EVENTS
In March 1999, the Company entered into a sales and license agreement to sell a
certain product line for $3,000,000. In addition, the Company will provide
technical development support and marketing sales assistance in exchange for
support fees of up to $2,000,000 over the next 24 months. Furthermore, the buyer
agreed to promote the Company's e-commerce solutions. In exchange for these
promotional activities, the Company issued a warrant to purchase 250,000 shares
of common stock at an exercise price of $16.80 per share, expiring in March
2004.
NOTE 11 - RESTATEMENT OF BARTER TRANSACTIONS
During the year ended December 31, 1998, the Company entered into agreements
with two barter companies. Under the agreements, the Company sold a number of
its business-to-business products to these companies and recorded a total of
$1.1 million in sales, which was the fair market value of the products. In
payment for these sales, the barter companies provided the Company barter
credits valued at $1.1 million. To use the $1.1 million barter credits, the
Company would have to spend approximately $2.7 million with the barter companies
during the periods of the agreements in media advertising and travel services.
As of May 19, 1999, no significant portion of the products had been sold by the
two barter companies and no barter credits had been used by the Company. Based
on this current information, the Company has decided to take a more conservative
policy with regard to these barter transactions and has restated its sales in
1998 by reversing the sales of $1.1 million and removing the assets of $1.1
million in barter credits.
The restatement reduces revenue by $1.1 million, increases the net loss by $1.1
million and reduces assets by $1.1 million. The Company intends to use the
barter credits of $1.1 million commencing in the third and fourth quarters of
1999.
37
<PAGE>
SIGNATURE
In accordance with Section 13 or 15(d) 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 24, 1999 By: /s/ JOYCE FREEDMAN
-------------------------
Joyce Freedman
Chairman of the Board and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
/s/ JOYCE FREEDMAN Chairman of the Board and May 24, 1999
- ------------------------ Chief Executive Officer --------------
Joyce Freedman Date
/s/ MAURIZIO VECCHIONE President, May 24, 1999
- ------------------------ Chief Operating Officer --------------
Maurizio Vecchione and Director Date
/s/ LEE FREEDMAN Vice President, Finance, May 24, 1999
- ------------------------ Chief Financial Officer and ---------------
Lee Freedman Director Date
/s/ ANDREA VECCHIONE Secretary and Director May 24, 1999
- ------------------------ --------------
Andrea Vecchione Date
/s/ STEPHEN WYLE Director May 24, 1999
- ------------------------ --------------
Stephen Wyle Date
/s/ PETER FRANK Director May 24, 1999
- ------------------------ --------------
Peter Frank Date
/s/ LESLIE SALESON Director May 24, 1999
- ------------------------ --------------
Leslie Saleson Date
38
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated March 16, 1999 (except for Note 11, as to which
the date is May 19, 1999) accompanying the restated financial statements
included in the Amended Annual Report of ModaCAD, Inc. on Form 10-KSB/A for the
year ended December 31, 1998. We hereby consent to the incorporation by
reference of said report in the Registration Statements of ModaCAD, Inc. on
Forms S-3 (#333-76745, dated April 21, 1999), S-3 (#333-76777, dated April 22,
1999), S-8 (#333-61443, dated August 14, 1998), S-8 (#333-35987, dated September
19, 1997), S-3/A (#333-26349, dated June 18, 1997), S-3/A (#333-26691, dated
June 18, 1997), and S-8 (#333-21775, dated February 14, 1997).
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
May 19, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AND STATEMENT OF OPERATIONS AS OF DECEMBER 31, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH 10-KSB FOR FISCAL YEAR ENDED DECEMBER 31,1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 6,343,599
<SECURITIES> 0
<RECEIVABLES> 884,987
<ALLOWANCES> 132,500
<INVENTORY> 2,475
<CURRENT-ASSETS> 7,493,187
<PP&E> 3,529,488
<DEPRECIATION> 1,069,832
<TOTAL-ASSETS> 13,049,941
<CURRENT-LIABILITIES> 740,250
<BONDS> 0
0
0
<COMMON> 26,575,627
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 13,049,941
<SALES> 6,681,280
<TOTAL-REVENUES> 6,681,280
<CGS> 82,135
<TOTAL-COSTS> 82,135
<OTHER-EXPENSES> 16,722,265
<LOSS-PROVISION> 917,438
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (9,687,639)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,687,639)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,687,639)
<EPS-PRIMARY> (1.59)
<EPS-DILUTED> (1.59)
</TABLE>
