<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, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 0-28088
MODACAD, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
California 95-4145930
------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
3861 Sepulveda Blvd., Culver City 90230
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(310) 751-2100
---------------------------
(Issuer's telephone number)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.Yes X No
--- ---
The number of outstanding shares of the registrant's common stock, as of
November 16, 1998, was 6,111,374.
Transitional Small Business Disclosure Format: Yes No X
--- ---
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ModaCAD, Inc.
BALANCE SHEET
September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 9,358,123
Accounts receivable,
net of allowance for doubtful accounts of $543,575 2,890,948
Inventories 10,350
Prepaid expenses and other current assets 287,669
-------------
Total current assets 12,547,090
Capitalized computer software development costs,
net of accumulated amortization of $2,477,369 5,315,081
Furniture and equipment, net (Note 2) 1,898,272
Investment in and advances to unconsolidated subsidiary 55,324
Other assets 92,648
-------------
$ 19,908,415
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 964,620
Deferred income 226,916
-------------
Total current liabilities 1,191,536
-------------
Commitment (Note 3)
Stockholders' equity:
Common stock. no par value; authorized 15,000,000 shares;
issued and outstanding 6,109,374 (Note 4) 26,118,002
Accumulated deficit (7,401,123)
-------------
Total stockholders' equity 18,716,879
-------------
$ 19,908,415
=============
</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,
1998 1997 1998 1997
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net sales $1,959,803 $ 533,141 $ 6,554,543 $2,261,553
----------- ----------- ----------- -----------
Cost of sales 50,369 24,975 67,868 80,738
Selling, general & administrative 2,004,955 918,328 5,372,950 2,393,266
Research and development 512,625 38,003 2,987,770 85,079
Amortization of capitalized
software development costs 519,509 208,882 1,328,251 544,788
----------- ----------- ----------- -----------
Total expenses 3,087,458 1,190,188 9,756,839 3,103,871
----------- ----------- ----------- -----------
Loss from operations (1,127,655) (657,047) (3,202,296) (842,318)
Investment income 127,193 97,608 379,470 137,145
----------- ----------- ----------- -----------
Net loss $(1,000,462) $ (559,439) $(2,822,826)$ (705,173)
=========== =========== =========== ===========
Basic loss per share (Note 5) $ (0.16) $ (0.10) $ (0.46)$ (0.16)
=========== =========== =========== ===========
Diluted loss per share (Note 5) $ (0.15) $ (0.09) $ (0.43)$ (0.14)
=========== =========== =========== ===========
Weighted average
common shares outstanding 6,107,222 5,399,722 6,077,769 4,405,929
=========== =========== =========== ===========
</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,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,822,826) $ (705,173)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 230,922 42,065
Amortization of capitalized software
development costs 1,328,251 544,788
Provision for loss an accounts receivable 462,075 18,000
Issuance of warrants for services rendered 5,000 9,000
(Increase) decrease in:
Accounts receivable (1,191,871) 64,432
Inventories 5,213 7,800
Prepaid expenses and other current assets 444,544 (2,814)
Other assets (1,000) (12,237)
Increase (decrease) in:
Accounts payable and accrued expenses 603,900 227,712
Deferred income 122,635 12,063
------------ ------------
Net cash provided by (used in) operating activities (813,157) 211,264
------------ ------------
Cash flows from investing activities:
Purchase of furniture and equipment (1,132,771) (396,724)
Capitalized computer software development cost (1,711,591) (1,906,251)
------------ ------------
Net cash used in investing activities (2,844,362) (2,302,975)
------------ ------------
Cash flows from financing activities:
Repayment of borrowings from officers/stockholders 0 (75,000)
Proceeds from issuance of common stock and warrants 595,650 12,172,877
------------ ------------
Net cash provided by financing activities 595,650 12,097,877
------------ ------------
Net increase (decrease) in cash (3,061,869) 10,006,166
Cash, beginning of period 12,419,992 2,138,963
------------ ------------
Cash, end of period $ 9,358,123 $12,145,129
============ ============
Supplemental Cash Flow Information
Interest paid $ 0 $ 0
=========== ===========
Income taxes paid $ 13,263 $ 6,381
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
ModaCAD, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 1: GENERAL
As contemplated by the Securities and Exchange Commission under Item 310(b) of
Regulation S-B, the accompanying financial statements and footnotes have been
condensed and therefore do not contain all disclosures required by generally
accepted accounting principles. The interim financial data are unaudited;
however, in the opinion of ModaCAD, Inc. (the "Company" or "ModaCAD"), the
interim data include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results for the interim
periods. Results for interim periods are not necessarily indicative of those to
be expected for the full year.
Note 2: FURNITURE AND EQUIPMENT
Furniture and equipment consist of the following:
<TABLE>
<S> <C>
Furniture and fixtures $ 252,534
Office equipment 210,078
Computer equipment and software 1,962,431
Leasehold improvements 404,536
------------
$ 2,829,579
Less: Accumulated depreciation 931,307
------------
$ 1,898,272
============
</TABLE>
Note 3: COMMITMENT
Employment Agreements
In April 1998, the Company entered into new employment agreements effective
January 1, 1998 with Ms. Freedman, as Chairman of the Board and Chief Executive
Officer, and Mr. Vecchione, as President and Chief Operating Officer, which have
terms expiring December 31, 2005. The employment agreements each provide for an
annual salary of $200,000, a signing bonus of $100,000 and a monthly automobile
allowance of $600. Each employment agreement further provides for an annual
performance bonus payable for each calendar year during the term of the
agreement, in an amount to be determined by the Compensation Committee of the
Board. In addition, in connection with the new employment agreements, the
Company granted to Ms. Freedman and Mr. Vecchione each a five-year option to
purchase up to 200,000 shares of Common Stock, subject to approval by the
Company's shareholders at the 1998 annual meeting. Such options vest and become
exercisable as follows: if the closing sale price of the Company's Common Stock
is greater than $10 per share for a period of 20 consecutive trading days in any
fiscal year during the term of the employment agreement, options to purchase 50
shares of Common Stock for each $1,000 of net income (before deductions for
taxes and executive bonuses) of the Company in such calendar year vest and
become exercisable at an exercise price equal to the market value per share on
the grant date.
4
<PAGE>
ModaCAD, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 4: STOCKHOLDERS' EQUITY
Warrants
In connection with the IPO, the Company issued to the principal underwriter in
the IPO, for $1,400, a warrant to purchase 140,000 units, at a per unit exercise
price of $6.00, each unit consisting of one share of common stock and one
redeemable warrant exercisable to purchase one share of common stock at an
exercise price of $9.10 per share. Such warrants are exercisable for a four-year
period, which began March 27, 1997. As of September 30, 1998, the underwriter
(or assignees of the underwriter) exercised a portion of the warrants to
purchase an aggregate of 114,700 shares of the Company's common stock and
114,700 redeemable common stock purchase warrants. Additionally, 30,800 of
114,700 redeemable common stock purchase warrants were further exercised to
purchase 30,800 shares of the Company's common stock.
In December 1996, the Company issued to an outside consultant, for services
provided to the Company, 250,000 common stock purchase warrants, expiring in
December 1999, at an exercise price of $5.00 per share. As of September 30,
1998, these warrants have not been exercised.
In November 1997, the Company issued to its project co-developer, for services
to be provided to the Company, 126,316 common stock purchase warrants, expiring
in November 2002, at an exercise price of $19.00 per share. As of September 30,
1998, these warrants have not been exercised.
Stock Option Plan
In 1995, the Company adopted the 1995 Stock Option Plan (the "Plan") which
expires in 2006. In June 1997, the Plan was amended, upon receipt of shareholder
approval, to increase the number of shares of common stock authorized for
issuance pursuant to the exercise of stock options granted under the Plan from
300,000 to 750,000 shares. In April 1998, the Plan was further amended,
contingent upon receipt of shareholder approval which was received 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. As of September 30, 1998, 89,000 shares had been issued upon
the exercise of options granted under the Plan, 1,389,454 shares were issuable
upon the exercise of outstanding options with exercise prices ranging from
$4.6875 to $20.0625 per share and 171,546 shares remained available for
additional option grants under the Plan.
Note 5: NET LOSS PER SHARE
The Company adopted SFAS No. 128, "Earnings per Share." Basic loss per share is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding. Diluted loss per share is computed
similarly to basic loss per share, except that the denominator is increased to
include the number of additional common shares that would have been outstanding
if the potential common shares had been issued and if the additional common
shares were dilutive. Loss per share for the third quarter of 1997 and loss per
share for the first nine months of 1997 have been restated using the
methodologies of SFAS No. 128.
5
<PAGE>
Note 6: SUBSEQUENT EVENTS
Loan Agreement
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. As of November 16, 1998, no amounts have been
drawn against the line of credit.
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
The Company is in the business of developing, marketing, and supporting Internet
sites, Internet enabled applications and, software products based on its
proprietary technology for content management, including modeling and rendering
technology. 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: e-commerce (Internet sites and Internet enabled software
applications) and business-to-business (electronic merchandising products,
including computer aided design or "CAD").
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 electronic commerce of goods in the business to
consumer sectors, including the apparel, footwear, accessories and, cosmetics
industries.
The Company's electronic merchandising 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 photo
realistic imagery. These products combine the Company's technology with digital
product catalogs produced by the Company or by product manufacturers.
Results Of Operations
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
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,
----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C> <C> <C>
Net sales $ 1,960 100.0% $ 533 100.0%
Cost of sales 50 2.5 25 4.7
Selling, general and administrative 2,005 102.3 918 172.2
Research and development 513 26.2 38 7.1
Amortization of software development costs 519 26.5 209 39.2
------- ------- ------- ------
Total expenses 3,087 157.5 1,190 223.2
------- ------- ------- ------
Loss from operations (1,127) (57.5) (657) (123.2)
Investment income 127 6.5 98 18.3
------- ------- -------- ------
Net loss $(1,000) (51.0%) $ (559) (104.9%)
======= ======= ======== ======
</TABLE>
7
<PAGE>
Net Sales
Net sales increased $1,427,000, or 268%, to $1,960,000 in the third quarter of
1998 from $533,000 in the third quarter of 1997 primarily due to $571,000 sales
increase from the Company's commercial products (electronic merchandising and
CAD products), $810,000 revenue increase in connection with the Company's
consumer products as discussed below and $46,000 revenue increase from the
Company's maintenance fees and consulting and training services.
Sales of commercial products increased $571,000, or 150%, to $952,000 in the
third quarter of 1998 from $381,000 in the third quarter of 1997 primarily due
to $600,000 sales generated from purchases by one of the Company's customers in
the third quarter of 1998. No such revenue was generated from customers in the
third quarter of 1997.
Revenue generated from consumer products increased $810,000 or 717%, to $923,000
in the third quarter of 1998 from $113,000 in the third quarter of 1997
primarily due to $900,000 of revenue generated in connection with the Company's
two newly developing e-commerce projects in the third quarter of 1998. No such
revenue was generated in the third quarter of 1997 as the Company commenced
developing these two projects in 1998.
Revenue from consulting services increased $4,000 in the third quarter of 1998
from the third quarter of 1997 due to the fact that the Company received $4,000
in revenue generated from consulting services in the third quarter of 1998
compared to no revenue from consulting services in the third quarter of 1997.
Revenue from training services increased $4,000, or 80%, to $9,000 in the third
quarter of 1998 from $5,000 in the third quarter of 1997. This increase in
services revenue was due primarily to the sales increase in the Company's
commercial products. Net sales resulting from product maintenance fees increased
$38,000 in the third quarter of 1998 from the third quarter of 1997.
Cost of Sales
Cost of sales increased $25,000, or 100%, to $50,000 in the third quarter of
1998 from $25,000 in the third quarter of 1997. This increase reflected the
sales increase in commercial products as no cost of sales was incurred in
connection with the consumer products.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $1,087,000, or 118%, to
$2,005,000 in the third quarter of 1998 from $918,000 in the third quarter of
1997. Personnel costs increased $366,000, or 99%, to $734,000 in the third
quarter of 1998 from $368,000 in the third quarter of 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 66 as of September 30, 1997 to 118 as of
September 30, 1998. Additionally, certain related costs including travel,
marketing, telephone and office supplies expenses increased $486,000, or 126%,
to $872,000 in the third quarter of 1998 from $386,000 in the third quarter of
1997. Also, professional services including accounting, legal and consulting
services increased $152,000, or 152%, to $252,000 in the third quarter of 1998
from $100,000 in the third quarter of 1997. The increase in professional
services was primarily due to the Company's increased requirements for these
services in the third quarter of 1998 compared to the third quarter of 1997
resulting from the Company's increased operating activities. Further, rent and
lease expense increased $19,000, or 76%, to $44,000 in the third quarter of 1998
from $25,000 in the third quarter of 1997 resulting from the Company's
relocation to a larger facility building in March 1998. Finally, bad debt
expense increased $44,000, or 733%, to $50,000 in the third quarter of 1998 from
$6,000 in the third quarter of 1997 resulting from additional bad debt reserve
made due to the Company's increasing sales volume and accounts receivable
balance.
8
<PAGE>
Research and Development
The Company incurred $1,810,000 of research and development costs during the
third quarter of 1998, of which $1,297,000 was capitalized as software
development costs and $513,000 was expensed, compared to $656,000 for the third
quarter of 1997, of which $618,000 was capitalized and $38,000 was expensed. The
176% increase in research and development expenditures from the third quarter of
1997 to the third quarter of 1998 was primarily due to the hiring of additional
personnel in connection with the further development of the Company's commercial
and consumer products. A lower percentage of research and development
expenditures was capitalized in the third quarter of 1998 as compared to the
third quarter of 1997 due primarily to the Company completing two of its major
projects at the beginning of 1998. A significant portion of the research and
development expenses incurred prior to the completion of those two major
projects was capitalized as software development costs.
Amortization of Software Development Costs
The amortization of software development costs increased $310,000, or 148%, to
$519,000 in the third quarter of 1998 from $209,000 in the third quarter of 1997
because the Company began marketing (and amortizing development costs associated
with)several new versions of software products in 1998.
Investment Income
Investment income increased $29,000, or 30%, to $127,000 in the third quarter of
1998 from $98,000 in the third quarter of 1997 due to the increase in income
generated from a money market account in which the proceeds received toward the
end of 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.
Income Taxes
The Company recorded no provision for income taxes in either the third quarter
of 1998 or the third quarter of 1997 due to the utilization of net operating
loss carryforwards.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
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 June 30,
----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C> <C> <C>
Net sales $ 6,555 100.0% $2,262 100.0%
Cost of sales 67 1.0 81 3.6
Selling, general and administrative 5,373 82.0 2,393 105.8
Research and development 2,988 45.6 85 3.7
Amortization of software development costs 1,328 20.2 545 24.1
------- ------ ------- ------
Total expenses 9,756 148.8 3,104 137.2
------- ------ ------- ------
Loss from operations (3,201) (48.8) (842) (37.2)
Investment income 379 5.8 137 6.0
------- ------ ------- ------
Net loss $(2,822) (43.0%) $ (705) (31.2%)
======= ====== ======= ======
</TABLE>
9
<PAGE>
Net Sales
Net sales increased $4,293,000, or 190%, to $6,555,000 in the first nine months
of 1998 from $2,262,000 in the comparable period of 1997 due to $4,345,000
revenue increase from the Company's consumer products and $78,000 revenue
increase from maintenance fees offset by $67,000 sales decrease in the Company's
commercial products (electronic merchandising and CAD products) and $63,000
revenue decrease from consulting and training services.
Sales of commercial products decreased $67,000, or 3%, to $1,846,000 in the
first nine months of 1998 from $1,913,000 in the first nine months of 1997
primarily due to $667,000 sale decreases from the Company's existing commercial
product lines in the first nine months of 1998 as compared to the comparable
period of 1997. The decrease from its existing commercial product lines was due
to the fact that the Company's sales force was focused on marketing its new
commercial product line. The decrease was offset by $600,000 sales generated
from the Company's new commercial product line in the first nine months of 1998
compared to no such sales were generated in the first nine months of 1997 as the
product was introduced to the market in early of 1998.
Revenue generated from consumer products increased $4,345,000 or 3,621%, to
$4,465,000 in the first nine months of 1998 from $120,000 in the first nine
months of 1997 primarily due to $1,980,000 of revenue generated from the license
of the Company's 3-D Home Interiors product to its publisher and $2,462,000 of
revenue generated in connection with the Company's two newly developing
e-commerce projects in the first nine months of 1998. No such revenue was
generated in the first nine months of 1997.
Revenue from consulting services decreased $60,000 in the first nine months of
1998 from the first nine months of 1997 due to the fact that the Company
received $64,000 in revenue generated from consulting services customers in
connection with sales of its commercial product in the first nine months of 1997
and received only $4,000 in revenue generated from consulting services in the
comparable period of 1998.
Revenue from training services decreased by $3,000, or 8%, to $37,000 in the
first nine months of 1998 from $40,000 in the first nine months of 1997. This
decrease in services revenue was due primarily to the sales decrease in the
Company's commercial products. Net sales resulting from product maintenance fees
increased $78,000 in the first nine months of 1998 from the first nine months of
1997.
Cost Of Sales
Cost of sales decreased $14,000, or 17%, to $67,000 in the first nine months of
1998 from $81,000 in the first nine months of 1997. This decrease reflected the
sales decrease in commercial products as no cost of sales was incurred in
connection with the consumer products.
10
<PAGE>
Selling, General And Administrative Expenses
Selling, general and administrative expenses increased $2,980,000, or 125%, to
$5,373,000 in the first nine months of 1998 from $2,393,000 in the first nine
months of 1997. Personnel costs increased $1,297,000, or 129%, to $2,306,000 in
the first nine months of 1998 from $1,009,000 in the first nine months of 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 66 as of September 30, 1997 to 118
as of September 30, 1998. Additionally, certain related costs including travel,
marketing, telephone and office supplies expenses increased $783,000, or 85%, to
$1,704,000 in the first nine months of 1998 from $921,000 in the first nine
months of 1997. Also, professional services including accounting, legal and
consulting services increased $300,000, or 97%, to $610,000 in the first nine
months of 1998 from $310,000 in the first nine months of 1997. The increase in
professional services was primarily due to the Company's increased requirements
for these services in the first nine months of 1998 compared to the first nine
months of 1997 resulting from the Company's increased operating activities.
Further, rent and lease expense increased $83,000, or 157%, to $136,000 in the
first nine months of 1998 from $53,000 in the first nine months of 1997
resulting from the Company's relocation to a larger facility building in March
1998. Finally, bad debt expense increased $444,000, or 2,467%, to $462,000 in
the first nine months of 1998 from $18,000 in the first nine months of 1997
resulting from additional bad debt reserve of $402,000 made in the first nine
months of 1998. This additional reserve was made due to the Company's increasing
sales volume and accounts receivable and its review of certain specific
accounts.
Research And Development
The Company incurred $4,777,000 of research and development costs during the
first nine months of 1998, of which $1,789,000 was capitalized as software
development costs and $2,988,000 was expensed, compared to $1,991,000 for the
first nine months of 1997, of which $1,906,000 was capitalized and $85,000 was
expensed. The 140% increase in research and development expenditures from the
first nine months of 1997 to the first nine months of 1998 was primarily due to
the hiring of additional personnel in connection with the further development of
the Company's commercial and consumer products. A lower percentage of research
and development expenditures was capitalized in the first nine months of 1998 as
compared to the first nine months of 1997 due primarily to the Company
completing two of its major projects at the beginning of 1998. A significant
portion of the research and development expenses incurred prior to the
completion of those two major projects was capitalized as software development
costs.
Amortization Of Software Development Costs
The amortization of software development costs increased $783,000, or 144%, to
$1,328,000 in the first nine months of 1998 from $545,000 in the first nine
months of 1997 because the Company began marketing (and amortizing development
costs associated with) several new versions of software products in late 1997
and 1998 and a $527,000 write-off of the Company's 3-D Home Interiors product
development cost in connection with the sale of that product's license to the
Company's publisher in the first nine months of 1998.
Investment Income
Investment income increased $242,000, or 177%, to $379,000 in the first nine
months of 1998 from $137,000 in the first nine months of 1997 due to the
increase in income generated from a money market account in which the proceeds
received toward the end of 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.
Income Taxes
The Company recorded no provision for income taxes in either the first nine
months of 1998 or the first nine months of 1997 due to the utilization of net
operating loss carryforwards.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's accounts receivable balance increased $1,192,000, or 53%, to
$3,435,000 at September 30, 1998 from $2,243,000 at December 31, 1997. The
increase (indicating a total amount of sales generated exceeding a total amount
of cash received from the Company's customers during the first nine month of
1998) was primarily due to a total receivable balance of $1,200,000 at September
30, 1998, which were generated toward the end of the third quarter of 1998.
During the first nine months of 1998, nine of the Company's employees exercised
their stock options to purchase a total of 60,000 shares of the Company's common
stock for a cumulative purchase price of $437,000.
During the first nine months of 1998, the Company's IPO principal underwriter
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 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. As of November 16, 1998, no amounts have been
drawn against the line of credit.
The Company anticipates continuing to use its capital primarily to fund
activities related to the design, development, marketing, sales and support of
the Company's products. Together with its existing capital received from the
exercise of warrants as a result of the Company's notice of warrant redemption
in June 1997 and anticipated funds from operations, the Company believes that
its capital resources will be sufficient to provide its anticipated cash needs
for working capital and capital expenditure for at least the next 15 months
although the Company may seek to raise additional capital before then, depending
on various considerations and developments. Thereafter, if cash generated from
operations is insufficient to satisfy the Company's capital requirements, the
Company may have to sell additional equity or debt securities or obtain other
credit facilities (in addition to the line of credit agreement, into which the
Company entered in October 1998), assuming the Company can do so on acceptable
terms.
12
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
4.1 Amendment No. 4 to 1995 Stock Option Plan.1
27.1 Financial Data Schedule.2
(b) Reports on Form 8-K
(1) ModaCAD filed a report on Form 8-K, dated July 2, 1998,
relating to its Software Publishing Agreement with
Cendant Software Corporation dated June 17, 1998.
(2) ModaCAD filed a report on Form 8-K, dated August 12,
1998, relating to its Software Publishing Agreement
with Broderbund Software, Inc. dated June 29, 1998.
- --------
1 Incorporated by reference to the Registrant's Registration Statement on
Form S-8 as filed with the Commission on August 14, 1998.
2 This exhibit is being filed electronically in the electronic format specified
by EDGAR.
13
<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 16, 1998 By:/s/ LEE FREEDMAN
---------------------------
Lee Freedman
Vice President, Finance and
Chief Financial Officer
14
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Sequentially
Description Numbered Page
<S> <C>
4.1 Amendment No. 4 to 1995 Stock Option Plan.1
27.1 Financial Data Schedule.2
</TABLE>
- --------
1 Incorporated by reference to the Registrant's Registration Statement on
Form S-8 as filed with the Commission on August 14, 1998.
2 This exhibit is being filed electronically in the electronic format specified
by EDGAR.
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AND STATEMENT OF OPERATIONS AS OF MARCH 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH 10-QSB FOR QUARTER ENDED MARCH 31,1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 9,358,123
<SECURITIES> 0
<RECEIVABLES> 3,434,523
<ALLOWANCES> 543,575
<INVENTORY> 10,350
<CURRENT-ASSETS> 12,547,090
<PP&E> 2,829,579
<DEPRECIATION> 931,307
<TOTAL-ASSETS> 19,908,415
<CURRENT-LIABILITIES> 1,191,536
<BONDS> 0
0
0
<COMMON> 26,118,002
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 19,908,415
<SALES> 6,554,543
<TOTAL-REVENUES> 6,554,543
<CGS> 67,868
<TOTAL-COSTS> 67,868
<OTHER-EXPENSES> 9,688,971
<LOSS-PROVISION> 462,075
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,822,826)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,822,826)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,822,826)
<EPS-PRIMARY> (0.464)
<EPS-DILUTED> (0.432)
</TABLE>
