<PAGE>
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
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
------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
1954 Cotner Avenue, Los Angeles 90025
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(310) 312-9826
---------------------------
(Issuer's telephone number)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of the issuer's common stock, as of November
14, 1997, was 5,974,574.
Transitional Small Business Disclosure Format: Yes No X
--- ---
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ModaCAD, Inc.
BALANCE SHEET
September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash $ 12,145,129
Accounts receivable,
net of allowance for doubtful accounts of $130,141 1,260,421
Inventories 18,225
Prepaid expenses and other current assets 124,594
-------------
Total current assets 13,548,369
Capitalized computer software development costs,
net of accumulated amortization of $919,772 4,264,930
Furniture and equipment, net (Note 2) 920,034
Investment in and advances to unconsolidated subsidiary 55,324
Other assets 34,677
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$ 18,823,334
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 598,454
Deferred income 86,843
-------------
Total current liabilities 685,297
-------------
Stockholders' equity:
Common stock. no par value; authorized 15,000,000 shares;
issued and outstanding 5,815,574 (Note 4) 23,775,782
Accumulated deficit (5,637,745)
-------------
Total stockholders' equity 18,138,037
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$ 18,823,334
=============
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
ModaCAD, Inc.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net sales $ 533,141 $1,269,599 $2,261,553 $2,163,074
----------- ----------- ----------- -----------
Cost of sales 24,975 23,316 80,738 82,858
Selling, general & administrative 918,328 605,539 2,393,266 1,448,512
Research and development 38,003 20,491 85,079 63,141
Amortization of capitalized
software development costs 208,882 68,442 544,788 166,204
----------- ----------- ----------- -----------
Total expenses 1,190,188 717,788 3,103,871 1,760,715
----------- ----------- ----------- -----------
Income (loss) from operations (657,047) 551,811 (842,318) 420,359
Investment income 97,608 37,403 137,145 77,192
----------- ----------- ----------- -----------
Net income (loss) $ (559,439) $ 589,214 $ (705,173) $ 479,551
=========== =========== =========== ===========
Net income (loss) per share $ (0.09) $ 0.15 $ (0.15) $ 0.16
(Note 5) =========== =========== =========== ===========
Weighted average
common shares outstanding 5,947,586 3,908,259 4,820,513 3,088,104
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
ModaCAD, Inc.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (705,173) $ 479,551
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 42,065 57,141
Amortization of capitalized software
development costs 544,788 166,204
Provision for loss on accounts receivable 18,000 9,000
Issuance of warrants for services rendered 9,000 0
(Increase) decrease in:
Accounts receivable 64,432 (1,154,714)
Inventories 7,800 (28,200)
Prepaid expenses and other current assets 2,814 (111,322)
Other assets (12,237) (26,046)
Increase (decrease) in:
Accounts payable and accrued expenses 227,712 (478,622)
Deferred income 12,063 (16,054)
----------- -----------
Net cash provided by(used in) operating activities 211,264 (1,103,062)
----------- -----------
Cash flows from investing activities:
Purchase of furniture and equipment (396,724) (504,261)
Capitalized computer software development cost (1,906,251) (1,271,607)
----------- -----------
Net cash used in investing activities (2,302,975) (1,775,868)
----------- -----------
Cash flows from financing activities:
Repayment of borrowings under notes payable 0 (250,000)
Repayment of borrowings from officers/stockholders (75,000) (200,000)
Proceeds from issuance of common stock & warrants 12,172,877 5,429,612
Change in deferred offering costs 0 289,597
----------- -----------
Net cash provided by financing activities 12,097,877 5,269,209
----------- -----------
Net increase in cash 10,006,166 2,390,279
Cash, beginning of period 2,138,963 13,224
----------- -----------
Cash, end of period $12,145,129 $ 2,403,503
=========== ===========
Supplemental Cash Flow Information
Interest paid $ 0 $ 0
=========== ===========
Income taxes paid $ 6,381 $ 1,367
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
ModaCAD, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 1: GENERAL
As contemplated by the Securities and Exchange Commission under Item 310(b) of
Regulation S-B, the accompanying financial statements and footnotes have been
condensed and therefore do not contain all disclosures required by generally
accepted accounting principles. The interim financial data are unaudited;
however, in the opinion of ModaCAD, Inc. ("ModaCAD" or the "Company"), the
interim data include all adjustments, consisting only of normal recurring
adjustments, necessary to make the interim financial information not misleading.
Results for interim periods are not necessarily indicative of those to be
expected for the full year.
Note 2: FURNITURE AND EQUIPMENT
Furniture and equipment consist of the following:
<TABLE>
<S> <C>
Furniture and fixtures $ 163,738
Office equipment 84,577
Computer equipment and software 1,140,043
Leasehold improvements 89,067
------------
$ 1,477,425
Less: Accumulated depreciation 557,391
------------
$ 920,034
============
</TABLE>
Note 3: PAY-OFF OF ADVANCES FROM OFFICERS/STOCKHOLDERS
In April 1997, cash advances made to the Company by certain of the Company's
officers/stockholders in the amount of $75,000 were paid in full.
Note 4: STOCKHOLDERS' EQUITY
Redemption Notice for and Exercise of Publicly Traded Warrants
On June 19, 1997, upon meeting the requisite criteria for redemption of
redeemable warrants issued in the Company's April 1996 initial public offering
(the "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 a total of 1,609,084 warrants to purchase 1,609,084 shares of
the Company's common stock for $10,459,046 and the Company redeemed the
remaining 916 unexercised warrants for $9.
4
<PAGE>
ModaCAD, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 4: STOCKHOLDERS' EQUITY (Continued)
Exercise of Warrants
In connection with loans made to the Company by a third party in December 1995
and January 1996, the Company granted such lender 125,000 and 75,000 warrants
with a two-year term, each with an exercise price of $4.00 per warrant. Each
warrant provided the holder with the right to purchase one share of the
Company's common stock and one redeemable warrant exercisable to purchase one
share of common stock at a price of $6.50 per share for a period of five years
from March 27, 1996. In the first nine months of 1997, the warrant holder
exercised a total of 127,500 warrants to purchase 127,500 shares of the
Company's common stock and 127,500 redeemable common stock purchase warrants
for $510,000. During such period, the warrant holder further exercised his
127,500 redeemable common stock purchase warrants to purchase 127,500 shares
of common stock for $828,750.
Exercise of Underwriter's Warrants
In connection with the IPO, the Company issued to the principal underwriter in
the IPO, for $1,400, a warrant to purchase 140,000 units, at a per unit
exercise price of $6.00, each unit consisting of one share of Common Stock and
one redeemable warrant exercisable to purchase one share of Common Stock at an
exercise price of $9.10 per share. Such units are exercisable for a four-year
period commencing March 27, 1997. In the first nine months of 1997, the
underwriter (or assignees of the underwriter) exercised a total of 60,100
warrants to purchase 60,100 shares of the Company's common stock and 60,100
redeemable common stock purchase warrants for $360,600. The underwriter
further exercised its 12,600 redeemable common stock purchase warrants to
purchase 12,600 shares of common stock for $114,660.
Stock Option Plan
In 1995, the Company adopted the 1995 Stock Option Plan (the "Plan") which
expires in 2006. In June 1997, the Plan was amended, upon receipt of
shareholder approval, to increase the number of shares of common stock
authorized for issuance pursuant to the exercise of stock options under the
Plan from 300,000 to 750,000 shares. As of September 30, 1997, the Company
had granted options to purchase a total of 487,000 shares of common stock to
employees with exercise prices ranging from $4.6875 to $16.25 per share. Six
of such employees exercised their options to purchase a total of 15,000 shares
of common stock at the exercise prices of $4.6875 and $5.875 per share.
Note 5: NET INCOME/LOSS PER SHARE
Net income/loss per share is based on the weighted average number of shares and
equivalent shares of common stock outstanding during each quarter and each
six-month period. Primary and fully-diluted net income/loss per share are not
materially different.
5
<PAGE>
ModaCAD, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 5: NET INCOME/LOSS PER SHARE (Continued)
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128 (SFAS No.128), "Earning Per Share", which is
effective for financial statements issued for periods ending after December 31,
1997. SFAS No. 128 requires public companies to present basic earnings per
share and, if applicable, diluted earnings per shares, instead of primary and
fully diluted earnings per share. The Company has not yet determined the
effect of adopting SFAS No. 128.
Note 6: SUBSEQUENT EVENTS
Exercise of Warrants
In October 1997, the Company's third party lender to the Company mentioned in
Note 4 exercised his remaining outstanding 72,500 warrants to purchase 72,500
shares of the Company's common stock and 72,500 redeemable common stock
purchase warrants for $290,000. Immediately thereafter, the warrant holder
further exercised his 72,500 redeemable common stock purchase warrants to
purchase 72,500 shares of common stock for $471,250.
Exercise of Stock Option
In October 1997, one of the Company's employees exercised his options under the
1995 Stock Option Plan to purchase 2,000 shares of common stock at the exercise
price of $4.6875 per share.
Exercise of Underwriter's Warrants
In November 1997, the underwriter mentioned in Note 4 exercised 10,000 warrants
to purchase 10,000 shares of the Company's common stock and 10,000 redeemable
common stock purchase warrants for $60,000.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the financial
statements and the notes thereto appearing elsewhere in this Form 10-QSB.
GENERAL
ModaCAD, Inc. ("ModaCAD" or the "Company") was incorporated in 1988 to develop,
market and support software products based on its proprietary modeling and
rendering technology for use in industrial design applications including the
apparel, textile and home furnishings industries. The Company's products
utilize the Company's proprietary modeling and rendering technology, operate on
standard personal computers running Macintosh or Windows operating systems and
are grouped into two principal product groups: commercial (computer aided
design or "CAD" and electronic merchandising products) and consumer (3-D Home
Interiors products). The Company's CAD software products are used principally
by industrial designers to model three-dimensional synthetic objects from
two-dimensional images and to render such objects in real time with
photorealistic imagery. The Company's electronic merchandising products
combine the Company's technology with digital product catalogs produced by the
Company or by product manufacturers using the Company's CAD software. The
Company completed its development of the 3-D Home Interiors product in 1996 and
commenced receiving royalties from sales of this consumer product late in the
second quarter of 1997. The amount of revenues received from such products
depends on various factors outside the Company's control including, to a
significant extent, on the Company's sole publisher of the 3-D Home Interiors
product, the price the publisher establishes from time to time for such
product, customer acceptance of such product, royalties payable based on
product sales and the publisher's marketing.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
The following table sets forth selected items from the Company's statements of
operations (in thousands) and the percentages that such items bear to net sales:
<TABLE>
<CAPTION>
Three Months Ended September 30,
----------------------------------
1997 1996
--------------- ---------------
<S> <C> <C> <C> <C>
Net sales $ 533 100.0% $1,270 100.0%
Cost of sales 25 4.7 23 1.8
Selling, general and administrative 918 172.2 606 47.7
Research and development 38 7.1 20 1.6
Amortization of software development costs 209 39.2 69 5.4
------- ------ ------- ------
Total expenses 1,190 223.2 718 56.5
------- ------ ------- ------
Income (loss) from operations (657) (123.2) 552 43.5
Investment income 98 18.3 37 2.9
------- ------ ------- ------
Net income (loss) $ (559) (104.9%) $ 589 46.4%
======= ====== ======= ======
</TABLE>
7
<PAGE>
Net Sales
Net sales decreased $737,000, or 58%, to $533,000 in the third quarter of 1997
from $1,270,000 in the third quarter of 1996 primarily due to sales decrease
in the Company's commercial products (electronic merchandising and CAD
products) and the reduction in revenues from consumer products and maintenance
services.
Sales of commercial products decreased $91,000, or 19%, to $381,000 in the
third quarter of 1997 from $472,000 in the third quarter of 1996 primarily due
to the fact that the Company's sales force was focused on planning and
implementing strategies for its e-commerce initiatives as well as other
commercial product line in the third quarter of 1997. No revenue was
generated from these two product lines as they were in the planning stage.
Revenue generated from consumer products decreased $637,000, or 85%, to
$113,000 in the third quarter of 1997 from $750,000 in the third quarter of
1996 due to the fact that the revenue generated in the third quarter of 1996
was attributable to an agreement between the Company and its consumer software
publisher with respect to the Company's interior home decorating software
products. The Company had no such source of revenue in the third quarter of
1997. Revenue generated from consumer products in the third quarter of 1997
was mainly related to the royalty payments received from the Company's
publisher in connection with the sales of the Company's 3-D Home Interiors
product in the third quarter of 1997.
Training services increased by $2,000, or 67%, to $5,000 in the third quarter
of 1997 from $3,000 in the third quarter of 1996 primarily due to the Company's
decision to eliminate its outside independent contractor and to provide
customer training itself. Net sales in the third quarter of 1997 also reflect a
$6,000 decrease in product maintenance fees.
Cost of Sales
Cost of sales increased $2,000, or 9%, to $25,000 in the third quarter of 1997
from $23,000 in the third quarter of 1996. The increase is primarily due to an
increase in digital catalog production cost from the third quarter of 1996 to
the third quarter of 1997. Although sales of the Company's commercial products
overall decreased from the third quarter of 1996 to the third quarter of 1997,
sales of digital catalog products increased. As digital catalog products have
a higher production cost than other commercial products, cost of sales in the
third quarter of 1997 increased accordingly.
8
<PAGE>
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $312,000, or 51%, to
$918,000 in the third quarter of 1997 from $606,000 in the third quarter of
1996. This increase was primarily due to three factors. First, the increase
of $72,000 in personnel costs resulted from the hiring of additional personnel
in late 1996 and 1997 to support the Company's increased operating activities.
Second, certain related costs including travel, marketing, telephone and office
supplies expenses increased $215,000, or 126%, to $386,000 in the third quarter
of 1997 from $171,000 in the third quarter of 1996. The increases in the
marketing expenses reflect the implementation of the Company's planned
expansion into new markets after the close of the Company's initial public
offering (the "IPO") in April 1996. Third, professional services including
accounting, legal and consulting services increased $42,000, or 72%, to
$100,000 in the third quarter of 1997 from $58,000 in the third quarter of
1996. The increase in professional services was primarily due to the Company's
increased requirements for these services in the third quarter of 1997 compared
to the third quarter of 1996.
Research and Development
The Company incurred $656,000 of research and development costs during the
third quarter of 1997, of which $618,000 was capitalized as software
development costs and $38,000 was expensed, compared to $515,000 for the third
quarter of 1996, of which $495,000 was capitalized and $20,000 was expensed.
The 27% increase in research and development expenditures from the third
quarter of 1996 to the third quarter of 1997 was primarily due to the hiring of
additional personnel in connection with the further development of the
Company's commercial and consumer products.
Amortization of Software Development Costs
The amortization of software development costs increased $140,000, or 203%, to
$209,000 in the third quarter of 1997 from $69,000 in the third quarter of 1996
as the Company began marketing (and amortizing development costs associated
with) several new versions of software products after the second quarter of
1996.
Investment Income
Investment income increased $61,000, or 165%, to $98,000 in the third quarter
of 1997 from $37,000 in the third quarter of 1996 due to the increase in
dividend income generated from a money market account in which the unexpended
proceeds from the Company's IPO and the exercise by warrant holders of the
Company's public warrants are maintained. The increase in dividend income
resulted from a larger balance maintained in the money market account in the
third quarter of 1997 due to the receipts of the proceeds from the exercise by
warrant holders of the public warrants as compared to the balance maintained in
that account in the third quarter of 1996.
Income Taxes
The Company recorded no provision for income taxes in either the third quarter
of 1997 or the third quarter of 1996 due to the utilization of net operating
loss carryforwards.
9
<PAGE>
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
The following table sets forth selected items from the Company's statements of
operations (in thousands) and the percentages that such items bear to net sales:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------
1997 1996
--------------- ---------------
<S> <C> <C> <C> <C>
Net sales $2,262 100.0% $2,163 100.0%
Cost of sales 81 3.6 83 3.8
Selling, general and administrative 2,393 105.8 1,449 67.0
Research and development 85 3.7 63 2.9
Amortization of software development costs 545 24.1 166 7.7
------- ------ ------- ------
Total expenses 3,104 137.2 1,761 81.4
------- ------ ------- ------
Income (loss) from operations (842) (37.2) 402 18.6
Investment income 137 6.0 77 3.6
------- ------ ------- ------
Net income (loss) $ (705) (31.2%) $ 479 22.2%
======= ====== ======= ======
</TABLE>
Net Sales
Net sales increased $99,000, or 5%, to $2,262,000 in the first nine months of
1997 from $2,163,000 in the comparable period of 1996 primarily due to sales
increase in the Company's commercial products (electronic merchandising and CAD
products) and revenues increases from consulting and training services and
maintenance fees. However, the reduction in revenue from consumer products
offset those increases. Net sales attributable to hardware sales decreased by
$8,000 due to the Company's decision to phase out its hardware sales in 1995.
The Company generated no hardware sales revenue in the first nine months of
1997.
Sales of commercial products increased $682,000, or 55%, to $1,913,000 in the
first nine months of 1997 from $1,231,000 in the first nine months of 1996
primarily due to foreign sales amounting to $400,000 generated from two of the
Company's major customers in Europe and domestic sales amounting to $363,000
generated from two other major customers in the first nine months of 1997.
Revenue generated from consumer products decreased $645,000, or 84%, to
$120,000 in the first nine months of 1997 from $765,000 in the first nine
months of 1996 due to the fact that the revenue generated in the first nine
months of 1996 was attributable to an agreement between the Company and its
consumer software publisher with respect to the Company's interior home
decorating software products. The Company had no such source of revenue in the
first nine months of 1997. Revenue generated from consumer products in the
first nine months was mainly related to the royalty payments received from the
Company's publisher in connection with the sales of the Company's 3-D Home
Interiors product in the first nine months of 1997.
10
<PAGE>
The Company received $65,000 in revenue generated from consulting services in
the first nine months of 1997 compared to no revenue from consulting services
in the first nine months of 1996. These revenues were attributable to the
software consulting services provided to the Company's customers in conjunction
with the sales of commercial products and the customer's annual conference
meeting.
Training services increased by $11,000, or 39%, to $39,000 in the nine months
of 1997 from $28,000 in the first nine months of 1996 primarily due to the
Company's decision to terminate the relationship with its outside independent
contractor and to provide customer training itself. Net sales in the first
nine months of 1997 also reflect a $2,000 increase in product maintenance fees.
Cost of Sales
Cost of sales decreased $2,000, or 2%, to $81,000 in the first nine months of
1997 from $83,000 in the first nine months of 1996. This decrease is primarily
due to a $58,000 decrease in cost of hardware sales, which was offset by a
$56,000 increase in the cost of commercial product sales. The increase in the
cost of commercial product sales reflected the sales increase in commercial
products. The decrease in the cost of hardware sales was due to the Company's
decision to phase out its hardware sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $944,000, or 65%, to
$2,393,000 in the first nine months of 1997 from $1,449,000 in the first nine
months of 1996. This increase was primarily due to three factors. First, the
increase of $276,000 in personnel costs resulted from the hiring of additional
personnel in late 1996 to support the Company's increased operating activities.
Second, certain related costs including travel, marketing, telephone and office
supplies expenses increased $447,000, or 94%, to $921,000 in the first nine
months of 1997 from $474,000 in the first nine months of 1996. The increases
in the marketing expenses reflect the implementation of the Company's planned
expansion into new markets after the close of the Company's initial public
offering in April 1996. Third, professional services including accounting,
legal and consulting services increased $241,000, or 349%, to $310,000 in the
first nine months of 1997 from $69,000 in the first nine months of 1996. The
increase in professional services was primarily due to the Company's increased
requirements for these services in the first nine months of 1997 compared to
the first nine months of 1996 as a result of the Company's status as a public
company in 1997.
Research and Development
The Company incurred $1,991,000 of research and development costs during the
first nine months of 1997, of which $1,906,000 was capitalized as software
development costs and $85,000 was expensed, compared to $1,335,000 for the
first nine months of 1996, of which $1,272,000 was capitalized and $63,000 was
expensed. The 49% increase in research and development expenditures from the
first nine months of 1996 to the first nine months of 1997 was primarily due to
the hiring of additional personnel in connection with the further development
of the Company's commercial and consumer products.
11
<PAGE>
Amortization of Software Development Costs
The amortization of software development costs increased $379,000, or 228%, to
$545,000 in the first nine months of 1997 from $166,000 in the first nine
months of 1996 as the Company began marketing (and amortizing development costs
associated with) several new versions of software products after the first
sixth months of 1996.
Investment Income
Investment income increased $60,000, or 78%, to $137,000 in the first nine
months of 1997 from $77,000 in the third quarter of 1996 due to the increase in
dividend income generated from a money market account in which the unexpended
proceeds from the Company's IPO and the exercise by warrant holders of the
Company's public warrants are maintained. The increase in dividend income
resulted from a larger balance maintained in the money market account in the
third quarter of 1997 due to the receipts of the proceeds from the exercise by
warrant holders of the public warrants.
Income Taxes
The Company recorded no provision for income taxes in either the first nine
months of 1997 or the first nine months of 1996 due to the utilization of net
operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
On June 19, 1997, upon meeting the requisite criteria for redemption of
redeemable warrants issued in the Company's April 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 a total
of 1,609,084 warrants to purchase 1,609,084 shares of the Company's common
stock for $10,459,046 and the Company redeemed the remaining 916 unexercised
warrants for $9.
The Company's gross accounts receivable balance decreased $64,000, or 4%, to
$1,391,000 at September 30, 1997 from $1,455,000 at December 31, 1996. The
decrease was primarily due to the collection of a $750,000 payment from the
Company's consumer product distributor in March 1997 and a $726,000 receivable
balance at September 30, 1997 related to the sales generated from five of the
Company's major customers in the first nine months of 1997. The allowance for
doubtful accounts consists principally of amounts set up in the fourth quarter
of 1996 for two customers. The Company is still pursuing collection from these
customers.
12
<PAGE>
In connection with loans made to the Company by a third party in December 1995
and January 1996, the Company granted such lender 125,000 and 75,000 warrants
with a two-year term, each with an exercise price of $4.00 per warrant. Each
warrant provided the holder with the right to purchase one share of the
Company's common stock and one redeemable warrant exercisable to purchase one
share of common stock at a price of $6.50 per share for a period of five years
from March 27, 1996. In the first nine months of 1997, the warrant holder
exercised a total of 127,500 warrants to purchase 127,500 shares of the
Company's common stock and 127,500 redeemable common stock purchase warrants
for $510,000. During such period, the warrant holder further exercised his
127,500 redeemable common stock purchase warrants to purchase 127,500 shares
of common stock for $828,750. In October 1997, the Company's third party
lender to the Company exercised his remaining outstanding 72,500 warrants to
purchase 72,500 shares of the Company's common stock and 72,500 redeemable
common stock purchase warrants for $290,000. Immediately thereafter, the
warrant holder further exercised his 72,500 redeemable common stock purchase
warrants to purchase 72,500 shares of common stock for $471,250.
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 units are exercisable for a four-year
period commencing March 27, 1997. In the first nine months of 1997, the
underwriter (or assignees of the underwriter) exercised a total of 60,100
warrants to purchase 60,100 shares of the Company's common stock and 60,100
redeemable common stock purchase warrants for $360,600. The underwriter
further exercised its 12,600 redeemable common stock purchase warrants to
purchase 12,600 shares of common stock for $114,660.
The Company anticipates continuing to use its capital primarily to fund the
activities related to the design, development, marketing, sales and support of
the Company's products. Together with its existing capital and anticipated
funds from operations, the Company believes that the net proceeds received from
the exercise of the warrants will be sufficient to provide its anticipated cash
needs for working capital and capital expenditure for at least the next 15
months. Thereafter, if cash generated from operations is insufficient to
satisfy the Company's capital requirements, the Company may have to sell
additional equity or debt securities or obtain credit facilities, assuming the
Company can do so on acceptable terms.
13
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
ModaCAD's common stock commenced trading on the Nasdaq National
Market System on November 11, 1997. ModaCAD was previously listed
on the Nasdaq SmallCap Market.
The Company signed an agreement with Intel Corporation ("Intel") in
November 1997 for the co-development and distribution of interactive
software to be used in connection with Intel's Pentium(R) II
processor. The companies have agreed to co-develop an e-commerce
solution for fashion retailers and manufacturers using advanced
Internet push technology and multimedia enhancements which are
intended to enable a rich and personalized end-user shopping
experience.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 Financial Data Schedule.1
(b) Reports on Form 8-K
None.
- --------
1 This exhibit is being filed electronically in the electronic format specified
by EDGAR.
14
<PAGE>
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ModaCAD, INC.
Date: November 14, 1997 By: /s/ LEE FREEDMAN
---------------------------
Lee Freedman
Vice President, Finance and
Chief Financial Officer
15
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Sequentially
Description Numbered Page
<S> <C>
27.1 Financial Data Schedule.1
</TABLE>
- --------
1 This exhibit is being filed electronically in the electronic format specified
by EDGAR.
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AND STATEMENT OF OPERATIONS AS OF SEPTEMBER 30, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH 10-QSB FOR QUARTER ENDED SEPTEMBER 30,1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 12,145,129
<SECURITIES> 0
<RECEIVABLES> 1,390,562
<ALLOWANCES> 130,141
<INVENTORY> 18,225
<CURRENT-ASSETS> 13,548,369
<PP&E> 1,477,425
<DEPRECIATION> 557,391
<TOTAL-ASSETS> 18,823,334
<CURRENT-LIABILITIES> 685,297
<BONDS> 0
0
0
<COMMON> 23,775,782
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 18,823,334
<SALES> 2,261,553
<TOTAL-REVENUES> 2,261,553
<CGS> 80,738
<TOTAL-COSTS> 80,738
<OTHER-EXPENSES> 3,023,133
<LOSS-PROVISION> 18,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (705,173)
<INCOME-TAX> 0
<INCOME-CONTINUING> (705,173)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (705,173)
<EPS-PRIMARY> (0.146)
<EPS-DILUTED> (0.141)
</TABLE>
