<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Quarterly Period Ended March 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Transition Period From _______to_______
Commission File Number 000-22172
MIDISOFT CORPORATION
(Exact name of small business issuer as specified in its charter)
Washington 91-1345532
(State of incorporation) (I.R.S. Employer Identification No.)
1605 NW Sammamish Rd., Suite 205
Issaquah, Washington 98027
(Address of principal executive offices)
(425) 391-3610
(Issuer's telephone number)
Check whether the issuer (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
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Common stock, no par value; 5,805,402 shares outstanding;
as of April 25, 1997
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MIDISOFT CORPORATION
INDEX TO FORM 10-QSB
<TABLE>
<CAPTION>
PART I
FINANCIAL INFORMATION
PAGE
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<S> <C> <C>
Item 1. Financial Statements............................................................................. 3
a) Balance Sheets--March 31, 1997 and December 31, 1996
b) Statements of Operations--For the Three Months Ended March 31, 1997 and 1996
c) Statements of Cash Flows--For the Three Months Ended March 31, 1997 and 1996
d) Notes to Financial Statements--For the Three Months Ended March 31, 1997 and 1996
Item 2. Management's Discussion and Analysis of Financial Condition or Plan of Operation................. 8
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings................................................................................ 11
ITEM 2. Changes in Securities............................................................................ 11
ITEM 3. Defaults Upon Senior Securities.................................................................. 11
ITEM 4. Submission of Matters to a Vote of Security Holders.............................................. 11
ITEM 5. Other Information................................................................................ 11
ITEM 6. Exhibits and Reports on Form 8-K................................................................. 11
SIGNATURE 12
</TABLE>
2
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ITEM 1. MIDISOFT CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED) (AUDITED)
AT MARCH 31, AT DECEMBER 31,
1997 1996
------------ ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 63,000 $ 709,000
Accounts receivable--net of allowances of $796,000 in 1997 and $1,052,000 in
1996........................................................................ 614,000 1,282,000
Inventories................................................................... 886,000 942,000
Prepaid expenses and other receivable......................................... 402,000 282,000
------------ ---------------
Total current assets........................................................ 1,965,000 3,215,000
Property & equipment, net......................................................... 368,000 421,000
Capitalized software and other costs, net......................................... 301,000 455,000
------------ ---------------
Total assets................................................................ $2,634,000 $ 4,091,000
------------ ---------------
------------ ---------------
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable........................................................ $ 524,000 $ 691,000
Accrued wages & payroll taxes................................................. 162,000 186,000
Other accrued expenses........................................................ 188,000 118,000
Deferred revenue.............................................................. 442,000 821,000
------------ ---------------
Total current liabilities................................................... 1,316,000 1,816,000
------------ ---------------
Shareholders' equity
Common stock, no par value; 10,000,000 shares authorized, 5,675,126 issued and
outstanding in 1997 and 5,345,425 issued and outstanding in 1996............ 19,308,000 18,733,000
Preferred stock; 540,000 convertible shares outstanding in 1997; 1,100,000
convertible shares issued and outstanding in 1996........................... 540,000 1,100,000
Retained deficit.............................................................. (18,530,000) (17,558,000)
------------ ---------------
Total shareholders' equity.................................................. 1,318,000 2,275,000
------------ ---------------
Total liabilities and shareholders' equity.................................. $2,634,000 $ 4,091,000
------------ ---------------
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</TABLE>
See accompanying notes to financial statements.
3
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MIDISOFT CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
MARCH 31,
-------------------------
1997 1996
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<S> <C> <C>
Revenues.......................................................... $ 537,000 $ 512,000
Cost of revenues.................................................. 327,000 421,000
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Gross profit...................................................... 210,000 91,000
Operating expenses:
Sales and marketing............................................. 539,000 660,000
General and administrative...................................... 384,000 583,000
Research and development........................................ 265,000 218,000
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Total operating expenses...................................... 1,188,000 1,461,000
Operating loss.................................................... (978,000) (1,370,000)
Interest and other income/(expense)............................... 6,000 45,000
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Net loss.......................................................... $ (972,000) $ (1,325,000)
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Net loss per share................................................ $ (0.18) $ (0.28)
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Weighted average shares outstanding............................... 5,535,000 4,663,000
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</TABLE>
See accompanying notes to financial statements.
4
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MIDISOFT CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31,
--------------------------
<S> <C> <C>
1997 1996
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Cash flows from operations:
Net loss........................................................ $ (972,000) $ (1,325,000)
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Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation & amortization................................... 207,000 283,000
Interest Paid with Common Stock............................... 15,000 --
(Increase) decrease in assets:
Accounts receivable, net.................................... 668,000 798,000
Inventories................................................. 56,000 66,000
Prepaid expenses............................................ (120,000) (142,000)
Increase (decrease) in liabilities:
Trade accounts payable...................................... (167,000) (309,000)
Accrued wages & payroll taxes............................... (24,000) (76,000)
Other accrued expenses...................................... 70,000 59,000
Deferred revenue............................................ (379,000) 30,000
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Total adjustments......................................... 326,000 709,000
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Net cash (used) for operations............................ (646,000) (616,000)
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Cash from/(used for) investments:
Additions to plant & equipment.................................. -- (45,000)
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Net cash from/(used for) investments...................... -- (45,000)
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Cash flows from financing:
........................................ -- --
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Net cash provided by financing............................ -- --
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Net change in cash and cash equivalents........................... (646,000) (661,000)
Cash and cash equivalents, beginning of year...................... 709,000 2,143,000
----------- -------------
Cash and cash equivalents, end of period.......................... $ 63,000 $ 1,482,000
----------- -------------
----------- -------------
Supplemental cash flow information:
Common Stock issued in payment of interest.................. $ 15,000 $ --
</TABLE>
See accompanying notes to financial statements.
5
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MIDISOFT CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
INTERIM FINANCIAL INFORMATION
The condensed financial statements included herein have been prepared by
Midisoft Corporation (the "Company") without audit, according to the rules
and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and regulations. However,
in the opinion of management, the accompanying unaudited financial statements
contain all adjustments (consisting of only normal recurring accruals)
considered necessary to present fairly the results for the interim periods
presented. The accompanying condensed financial statements and related notes
should be read in conjunction with the Company's 1996 audited financial
statements included in its Annual Report on Form 10-KSB filed April 15, 1997.
The results of operations for the three months ended March 31, 1997 are not
necessarily indicative of the results to be expected for the full calendar year.
ACCOUNTS RECEIVABLE AND MAJOR CUSTOMER INFORMATION
Accounts receivable from Original Equipment Manufacturers (OEM) and other
resellers are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
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<S> <C> <C>
OEM.................................................................................. $ 1,005,000 $1,600,000
Resellers and other.................................................................. 405,000 734,000
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Subtotal............................................................................ 1,410,000 2,334,000
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Less: Allowance for doubtful accounts................................................ 721,000 781,000
Allowance for sales returns.................................................... 75,000 271,000
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Total accounts receivable............................................................ $ 614,000 $1,282,000
------------ ------------
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</TABLE>
Accounts receivable consist principally of amounts due from OEMs and
reseller customers for licensing fees, royalties and direct sales of products.
OEM customer payment terms typically are one year in duration and require
payments to be made in quarterly installments. At March 31, 1997, OEM accounts
receivable amounts not yet due were $282,000, equal to 28% of total OEM
receivables compared to $173,000, equal to 11% at December 31, 1996. Reseller
payment terms typically are standardized and similar to those given software
distributors. At March 31, 1997, reseller accounts receivable amounts not yet
due were $151,000, equal to 37% of total reseller receivables compared to
$154,000, equal to 21% at December 31, 1996.
The Company's primary credit concentrations involve domestic and foreign OEM
and reseller customers. Foreign customers are primarily located in Western
Europe, Taiwan, and Japan. Domestic customers comprised $693,000 of accounts
receivable at March 31, 1997, compared to $1,540,000 at December 31, 1996.
Foreign customers comprised $717,000 of accounts receivable at March 31, 1997
compared to $794,000 at December 31, 1996.
INCOME TAXES
No income taxes are payable at March 31, 1997, the result of the Company's
year-to-date loss and the result of Federal net operating losses at December 31,
1996 of approximately $18.1 million that will reduce taxes due in future periods
and expire beginning in 2008. In certain circumstances, as specified in the
Internal Revenue Code, a
6
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ACCOUNTS RECEIVABLE AND MAJOR CUSTOMER INFORMATION (CONTINUED)
50% or more ownership change by certain combination of the Company's
stockholders during any three-year period would result in limitations on the
Company's ability to utilize its net operating loss carry-forward.
INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
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<S> <C> <C>
Raw Materials......................................................................... $ 737,000 $ 760,000
Finished goods........................................................................ 249,000 287,000
Less: Allowance for obsolescence...................................................... (100,000) (105,000)
----------- ------------
Total capitalized software.......................................................... $ 886,000 $ 942,000
----------- ------------
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</TABLE>
CAPITALIZED SOFTWARE AND OTHER COSTS
Capitalized software and other costs are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
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<S> <C> <C>
Purchased software technology, net of accumulated amortization of $470,000 and
$412,000, respectively, in 1997 and 1996............................................. $ 135,000 $ 193,000
Purchased contract software technology, net of accumulated amortization of $423,000 and
$380,000, respectively, in 1997 and 1996............................................. 72,000 115,000
Capitalized software development costs, net of accumulated amortization of $483,000 and
$430,000, respectively, in 1997 and 1996............................................. 94,000 147,000
---------- ------------
Total capitalized software........................................................... $ 301,000 $ 455,000
---------- ------------
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</TABLE>
7
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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
Midisoft is a provider of innovative applications and utilities for the
control and use of sound on personal computers. The Company was founded in
1986 and has developed award-winning audio software products since that time.
Over the past 11 years the total available market for these types of products
has expanded dramatically from a very small segment of PCs used mainly by
computer hobbyists into virtually each computer that ships from every system
manufacturer. Sound on the PC has changed from a differentiating feature into
a standard component on all hardware platforms and product lines. The
emergence of the Internet has amplified this expansion and created the
backbone with which sounds, voice messages and music can now be sent globally
to enhance communication world-wide. The Company markets its products on a
worldwide basis to (i) original equipment manufacturers (OEMs), which
"bundle" one or more of Midisoft's products with their own products, (ii)
distributors and resellers, which directly supply the retail distribution
channel, and (iii) end users, catalog companies, and businesses and (iv)
on-line Internet sales.
Sales to software distributors and resellers, together with direct sales,
represented 50% of revenues in the three months ended March 31, 1997, and OEM
sales represented 50% during the same period. International sales accounted for
33% of the Company's revenues during the three months ended March 31, 1997.
Midisoft's customer base tends to vary from period to period as it establishes
new relationships in each of its customer segments. During the three months
ended March 31, 1997, no software distributor or OEM customer individually
accounted for greater than 10% of the Company's total revenues.
The Company's revenues include sales of software, software licenses and
services, less returns. Cost of revenues includes the costs of manuals,
diskettes and duplication, packaging materials, assembly, paper goods, shipping
and amortization of purchased software technology and capitalized software
development costs. Cost of revenues as a percentage of sales is lower for OEM
sales than for distributor and direct sales because few direct costs are
involved. Sales and marketing expenses consist primarily of salaries of sales
and marketing personnel, customer service and technical support costs and
advertising and promotion expenses. General and administrative expenses consist
of salaries of administrative personnel, legal and accounting costs and general
operating expenses including rent and insurance. Research and development
expenses consist primarily of personnel and equipment costs required to conduct
the Company's development efforts. Software development costs are expensed as
incurred, until technological feasibility is established, after which any
additional costs may be capitalized until the software is ready for release.
Amortization of capitalized software development costs begins when the related
product is available for release to customers. The Company has determined that
the dynamic nature of software technology precludes it from capitalizing
software development in the future.
Revenues from sales to distributors and resellers and direct sales are
recognized when products are shipped. The Company's software sales agreements
generally do not involve any significant obligations to customers subsequent to
delivery. Revenues from products licensed to OEMs, consisting of one-time
license fees, are recognized at the time the software master is delivered and
when the criteria for fixed fee revenue recognition under Statement of Position
No. 91-1 "Software Revenue Recognition" are satisfied.
Additional royalty use or unit copy royalty fees are recognized when they are
received pursuant to license agreements upon notification of shipment from OEMs.
SEASONALITY
Sales to distributors tend to be greater in the fourth quarter as consumers
buy software to supplement their holiday computer hardware purchases. OEM sales
are concentrated in a small number of large customer contracts and tend to occur
sporadically. Direct sales generally increase when software upgrades become
available.
8
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COMPARISON OF THREE MONTHS ENDED MARCH 31, 1997 TO 1996
Revenues for the three months ended March 31, 1997 were $537,000, an
increase of $25,000, compared to $512,000 for the same period in 1996. Sales to
software distributors and resellers, together with direct sales were $269,000,
representing 50% of revenues in the three months ended March 31, 1997, compared
to $464,000 which represented 91% of revenues for the same period in 1996. OEM
sales were $268,000 and $48,000 representing 50% and 9% for the same periods
respectively. International sales accounted for 33% of the Company's revenues
for the three months ended March 31, 1997 and 7% in 1996. The increase in
revenues was primarily the result of the availability of three new OEM products
during the first quarter of 1997.
Gross profit for the three months ended March 31, 1997 was $210,000, an
increase of $119,000, compared to $91,000 for the same period the prior year. As
a percentage of revenues, gross profit increased to 39% in the three months
ended March 31, 1997 from 18% in 1996. The increased gross profit percentage for
the three month period was primarily the result of higher OEM sales. Cost of
revenues as a percentage of sales is lower for OEM sales than for distributor
and direct sales because few direct costs are involved. Software amortization
costs for the three months ended March 31, 1997 fell to $154,000 as compared
with $219,000 for the same period during 1996. These capitalized software
costs are expected to be completely amortized by October, 1997.
Sales and marketing expenses for the three months ended March 31, 1997 were
$539,000, a reduction of $121,000, compared to $660,000 for the same period in
the prior year. As a percentage of revenues, sales and marketing expenses
decreased to 100% in the three months ended March 31, 1997 from 129% for the
same period in 1996. Higher sales and marketing expenses in 1996 was due to the
inclusion of personnel reorganization costs in the first quarter of 1996 not
experienced in 1997.
General and administrative expenses for the three months ended March 31,
1997 were $384,000, a decrease of $199,000, compared to $583,000 for the same
period of the prior year. As a percentage of revenues, these expenses for the
three months ended March 31, 1997 decreased to 72% in 1997 from 114% for the
same period in 1996. The current expense represents base levels for the
Company's general and administrative expenses whereas the first quarter of 1996
included legal costs of the shareholder class action suit which the Company
concluded in that quarter.
Research and development expenses for the three months ended March 31, 1997
were $265,000, an increase of $47,000, compared to $218,000 for the same period
the prior year. As a percentage of revenues, research and development expenses
increased to 49% in the three months ended March 31, 1997 from 43% for the same
period in 1996. The increase in research and development costs during the first
quarter 1997 reflects the increased efforts to complete three new products which
were introduced during the first quarter of 1997.
Interest and other income for the three months ended March 31, 1997 was
$6,000, compared to $45,000 for the same period the prior year. The decrease in
interest income in the first quarter of 1997 reflects a decrease in the amount
of cash available for investments due to use of cash in operations.
No income taxes are payable at March 31, 1997, the result of the Company's
year-to-date loss and the result of Federal net operating losses at December 31,
1996 of approximately $18,100,000. The net operating losses will reduce taxes
due in future periods and begin to expire in 2008.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997, the Company's principal sources of liquidity
included cash and cash equivalents of $63,000 and net accounts receivable of
$614,000. This compares to cash, cash equivalents and short term investments
of $709,000 and net accounts receivable of $1,282,000 at December 31, 1996.
The decline in liquidity and capital resources is the result of the Company's
negative cash flow from operations during its final stages of reorganization.
The Company's current liabilities at March 31, 1997 were $1,316,000 compared
to $1,816,000 at December 31, 1996. The Company has had no long term debt since
inception, and has no present commitments or agreements that could require any
long-term debt to be incurred. As of March 31, 1997, working capital totaled
$649,000.
9
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To date, the Company has financed its operations principally through the
net proceeds from its two public offerings and other equity transactions. The
Company's ability to fund continued operations depends on raising additional
capital during the second quarter of 1997. Should the Company be unable to
raise additional capital during such period, the Company could be required to
significantly reduce its operations and take other steps designed to conserve
capital and reduce ongoing expenses. Any such steps would likely have a
material adverse effect on the Company's ability to establish profitable
operations in the future. The Company expects to complete a private offering
in the second quarter, 1997 and that the funds received from this offering,
if completed, along with cash generated from the sale of products and
collections of accounts receivable, will be sufficient to meet the Company's
capital requirements for at least the next 12 months. The Company will
continue to pursue other financing arrangements, as needed, to increase its
cash reserves in 1997. There can be no assurance the Company will be capable
of raising additional capital or that the terms upon which such capital will
be available to the Company will be acceptable.
The Company is dependent to a material degree on OEM sales. OEM sales
accounted for 50% of revenue recognized during the three months ended March 31,
1997 as compared with 9% for the same period in 1996. The increase in sales is
attributable to increased efforts by the Company to develop products marketable
to computer chip and PC manufacturers.
The Company's operating activities used cash of $646,000 for the three month
period ended March 31, 1997, reflecting a nominal decrease from the first
quarter of 1996 and a 51% decrease from the fourth quarter of 1996.
10
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PART II
OTHER INFORMATION
<TABLE>
<S> <C>
ITEM 1. LEGAL PROCEEDINGS--ASK ME MULTIMEDIA ARBITRATION
On or about May 9, 1997, Ask Me Multimedia Corporation ("AMM")
served a Demand for Arbitration (the "Arbitration") on the
Company. The Artibration was filed with the American Arbitration
Association in Seattle, Washington. The Arbitration alleges that
in connection with the Company's purchase of assets from AMM in
early 1995, the Company breached certain of the representations,
warranties and covenants made to AMM. The Arbitration seeks
damages in excess of $1.1 million for, among other things, breach
of contract. The Company intends to vigorously defend the
Arbitration and to assert all available counterclaims against AMM.
The Company believes it has certain valid defenses and
counterclaims to the Arbitration, however, the Company cannot
predict the outcome of the Arbitration. Given the Company's
limited working capital, a significant damage award against the
Company could have a material adverse affect on future operations.
In addition, the existence of the Arbitration may adversely affect
the Company's ability to raise additional capital.
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--NONE
B) REPORTS ON FORM 8-K: Reports Filed on January 9, 1997, concerning the change in
the Corporation's Independent Auditors.
</TABLE>
11
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SIGNATURES
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.
MIDISOFT CORPORATION
(REGISTRANT)
DATE: MAY 13, 1997
BY: /s/ MELINDA A. BRYDEN
-----------------------------------------
Melinda A. Bryden, Vice President of
Finance and Chief Financial Officer
12
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SIGNATURES
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.
MIDISOFT CORPORATION
(REGISTRANT)
DATE: MAY 13, 1997
BY:
-----------------------------------------
Melinda A. Bryden, Vice President of
Finance and Chief Financial Officer
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000882692
<NAME> MIDISOFT CORPORATION
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 63000
<SECURITIES> 0
<RECEIVABLES> 1410000
<ALLOWANCES> 796000
<INVENTORY> 886000
<CURRENT-ASSETS> 1965000
<PP&E> 1028000
<DEPRECIATION> 660000
<TOTAL-ASSETS> 2634000
<CURRENT-LIABILITIES> 1316000
<BONDS> 0
0
540000
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<TOTAL-LIABILITY-AND-EQUITY> 2634000
<SALES> 537000
<TOTAL-REVENUES> 537000
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