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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-KSB
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Fiscal Year Ended December 31, 1996 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 000-22172
MIDISOFT CORPORATION
(Exact name of small business issuer as specified in its charter)
WASHINGTON 91-1345532
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1605 NW Sammamish Road, Suite 205,
Issaquah, Washington 98027
(Address of principal executive offices)
(206) 391-3610
(Issuer's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None N/A
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year were $3,113,000.
Aggregate market value of voting stock held by non-affiliates of the
registrant as of March 10, 1997 was $8,868,800 (based upon the closing sale
price of $1.88 per share on the Nasdaq National Market on such date). Number
of shares of Common Stock outstanding as of March 10, 1997: 5,624,951 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part III is incorporated by reference from the definitive proxy statement to be
filed in connection with the Company's 1997 Annual Meeting of Shareholders.
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MIDISOFT CORPORATION
ANNUAL REPORT ON FORM 10-KSB
TABLE OF CONTENTS
PART I
Page
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Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 11
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . 12
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters. . . . . . . . . . . . . . . . . . . . . . 13
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . 13
Item 7. Financial Statements and Supplementary Data. . . . . . . . . . 17
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . . . 30
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance With Section 16(a) of the
Exchange Act . . . . . . . . . . . . . . . . . . . . . . . . . 31
Item 10. Executive Compensation . . . . . . . . . . . . . . . . . . . . 31
Item 11. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Item 12. Certain Relationships and Related Transactions . . . . . . . . 32
Item 13. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 32
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
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PART I
ITEM 1.
BUSINESS
GENERAL
Midisoft is a leading 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. As new technologies evolve, the Company believes it
can continue to be the premiere provider of audio control expertise.
The precise science of managing and manipulating audio within the computing
environment is a non-trivial engineering endeavor. The Company's eleven year
development of its technology base in the programming of utilities and
applications focused on sound, has provided a competitive advantage, enabling
it to define and create products in an extremely efficient manner. This
advantage allows the Company's product strategy to closely track with the
very latest hardware developments which are now incorporating sound
components at an ever increasing rate.
Working closely with major hardware manufacturers (OEMs) to supply the
control software necessary to exploit the audio portion of their computers
and peripherals provides the Company with a "technological heads-up" that is
as desirable as it is unique. Strategic alliances with chip manufacturers
give the Company a view into the future of near and mid-term engineering
advancements that will eventually appear in desktop and laptop computers.
Supplying this same control functionality as well as audio software
applications to system makers provides the Company significant revenue
opportunities and access to next year's computer designs today. And finally,
applying this forward vision to the design of stand-alone software products
to be sold directly to end-users via traditional retail channels or from a
web site encompasses the entire spectrum of distribution.
MIDISOFT STRATEGIC PRODUCT LINE currently shipping consists of MIDISOFT
AUDIOWORKS, MIDISOFT AUDIO POSTCARD, MIDISOFT SOUND BAR, and MIDISOFT
MEDIAWORKS. Strategic Products in the stage of final development are
MIDISOFT INTERNET MEDIA PLAYER and MIDISOFT DVD PLAYER. The available
market for these titles alone is estimated to be in excess of 45 million
computers in 1997. Derivatives and sub-sets of these products are expected to
account for more than 65% of the Company's revenue in 1997. They will ship
under new and existing contracts with products from standard PC manufacturers
and others. The MIDISOFT DVD PLAYER for the PC will ship with one of the very
first Digital Versatel Discs ("DVD") equipped PCs to enter the market.
MIDISOFT MUSIC PRODUCT LINE currently consists OF MIDISOFT STUDIO, MIDISOFT
PLAY PIANO, MIDISOFT MIDIKIT, and FAMILY MUSIC CENTER and MIDISOFT DESKTOP SHEET
MUSIC, the first in a new generation of Midisoft scaleable applications.
Targeted at the $420 million per year category of printed music, MIDISOFT
DESKTOP SHEET MUSIC features state of the art "Plug-in" technology as well as a
feature set that should meet even the most demanding professionals needs. The
Company's new technologies allow it to scale product offerings and feature sets
to the needs of specific market segments or to the needs of individual OEM
customers. Two additional products that will feature Midisoft's technology are:
MIDISOFT STUDIO 5.0, an upgrade to Midisoft's flagship product, and MIDISOFT
TAPEDECK, a product aimed at the 66% of US
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musicians who are not keyboard players. The Company creates and markets these
products to bring music education, music composition, and professional
quality music creation to the average users desktop. This goal is
complemented by the continued development of Midisoft's plug-in technology.
Because the development cycle for application "Plug-ins" is very short in
comparison to the development cycle for an application, the Company believes
that it will have a competitive advantage by having shorter development
cycles that bring new product offerings and new technologies to market faster
than its competition. As new categories such as Internet media grow, the
Company expects to aggressively pursue new music and audio opportunities.
MARKET OVERVIEW
Audio capabilities have moved from being a product differentiator to a base line
standard for PC manufacturers. Traditionally the Company provided enabling
software for audio to OEMs and application software to end-users. The Company
has expanded its market vertically to integrate its enabling products back to
the chip and card manufacturers and horizontally to third-party vendors. But
end-user excitement over new technologies such as DVD, MMX, streaming
audio/video has created pull-through demand for the Company's audio expertise.
The Company does not attempt to create a market for its technology, instead
focuses on trends established by industry leaders to create the direction for
new products.
By establishing sales programs which focus on the chip manufacturer, the
Company has expanded its market while maintaining its aim to be on all of the
77 million PCs expected to ship this year. The explosive growth of the
Internet with seemingly endless content potential further qualifies the
Company's product strategy, especially as blurring between computer and
consumer uses as DVD, Digital Cameras and radio over the Internet becomes
commonplace.
Market trends such as Intel's AC97 chip specification, which moves audio to a
system requirement level, and the integration of increasingly higher speed
modems into PCs allows the Company's software to be an economical and
distinguishing solution. According to the Audit Bureau of Circulation,
approximately 33% of US homes have PCs and 75% of those have modems. A
recent survey by AT&T showed that nearly 40%of adult consumer expected to
purchase something online in 1997. In another finding from AT&T, 70 percent
of the consumers polled said they had shopped by telephone in the past year,
averaging 16 purchases in which they gave out their credit card number.
These statistics indicate the consumer's readiness to shop online. The
Company's audio solutions change the dynamics of Internet shopping, making it
more appealing, more dramatic. The Company expects that Web sites without
sound will soon go the way of silent movies.
MARKET SIZE
[GRAPH]
MILLIONS 1996 1997 1998 1999 2000
PC Unit Shipments 69 77 85 94 102
Number E-Mail Users 60 80 130 180 200
PC's in Use 222 256 290 324 358
% PC's with Internet Access 14% 25% 40% 56% 68%
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The Company's potential market includes every new PC shipment. The Company
can provide the enabling and application software that strengthens the
chip/card manufacturer's and OEMs' ability to capitalize on the anticipated
growth of audio functions that incorporate DVD, Internet and e-mail users.
The Company's products provide product differentiation for chip/card
manufacturers and OEMs while assisting them in bringing products to market
faster. For example, DVD Players have high public awareness and have had a
strong start in 1997 even without significant content available. Dataquest
forecasts 2.1 million DVD Player units to ship this year increasing 500
percent in 1998 and 200 percent per year through 2001 with revenue exceeding
$4 billion by 2000. The Company expects to be among the first to market as
it ships its user interface with the STB Systems DVD card.
In 1996, music software became one of the top 10 applications of the year for
the first time. Demographic studies indicate a correlation between
PC/Internet users and musicians with a very strong tendency toward being
upscale, professional and well educated.
PRODUCTS AND PRODUCT DESIGN
The continued growth of the Intel architecture has fueled the need for
professional quality applications at the consumer level. With the rise of the
Pentium and Pentium Pro series of processors with MMX technology, the Company
expects that the average user will have a "Workstation" caliber machine on
their desk by 1998. Professional users such as graphic and audio designers
are also migrating to the Intel platform in greater numbers as the power of
Intel offerings surpasses that of the Macintosh platform. The market has also
seen a migration of professional music Studio users, a traditional Macintosh
stronghold, to the Intel platform. The Company believes that its products,
which are designed for the latest Intel technologies and offer ease of use
which is superior to that of the Macintosh, are positioned to embrace these
migrating users.
STRATEGY
The Company's strategy is to develop friendly, easy-to-use software that
offers integrated access to a broad range of PC features not currently in use
because end-users are either unaware of their existence or are incapable of
utilizing them. The Company's strategy is built around six basic elements:
EMPHASIZE SOFTWARE, NOT HARDWARE. The Company concentrates its
development efforts on modular software to enable core functionality for the
OEM and products for the end-user that can be quickly enhanced.
USE STANDARD OPEN SYSTEMS. The Company's products use standard, rather
than proprietary technology. As a result, the Company can rapidly adopt new
PC based technologies and thereby leverage the substantial expenditures made
by third parties who develop new technologies for the general PC environment.
MAKE PRODUCTS EASY TO USE AND INSTALL. The Company strives to
maximize ease of use for the end-user. The products are designed to be
"intuitive" with features that can be readily used without special training
or manuals. The Company believes that its reputation and experience with
audio user interfaces has been instrumental in establishing OEM relationships
with STB Systems and others.
DEVELOP PRODUCTS CONCURRENT WITH MARKET LEADERS. By beginning the
product development cycle with design sessions with industry leaders like
Microsoft, Intel and Kodak, the Company is provided access to the latest in
trends in technology and can begin creating product interfaces at the
earliest point in the market adaptation of a new technology.
INCREASE MARKET VISIBILITY. The Company has increased the visibility of
its products by inclusion in chip manufacturers' reference kits. The Company
achieves broad market coverage for its retail products primarily through the
use of regional manufacturer's representative firms and large retail
distributors such as Tech Data.
MINIMIZE DISTRIBUTION OVERHEAD. The Company licenses its products
internationally to in-country republishers who translate, manufacturer and
distribute the products while paying the Company a royalty per unit. The
Company has republishing agreements in Japan, Spain, Italy, Germany and
France.
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The following table provides the name, a short description, the target markets
and channels of distribution for the Company's 1997 product line. The date
following the product name indicates the release date. If such date is
ITALICIZED, it refers to the expected release date or upgrade date of the
Product.
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<CAPTION>
STRATEGIC
PRODUCTS
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PRODUCT DESCRIPTION MARKET INT'L CHANNELS
CONSUMER OEM
BUSINESS RETAIL
DIRECT
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<S> <C> <C> <C> <C> <C> <C> <C>
Midisoft MIDI, wave audio and CD audio are all supported in this X X X X X X
AUDIOWORKS PRO powerful OEM program. The familiar stereo rack provides many
software sound tools, plus the flexibility to manage and edit
March, 1997 the entire spectrum of interactive multimedia audio data.
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Midisoft Audio Postcard delivers the ability to embed audio notes X X X X X X
AUDIO POSTCARD into pictures. Users can add voice to digital snapshots or
video files. It includes a player to send these files over
March, 1997 the Internet in a simple manner.
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Midisoft This product is a player for the largest base of live or on X X X X X
INTERNET demand audio files on the Internet, Streamed files. This
MEDIA PLAYER player includes enhanced functionality superior to competing
products and allows the user to organize audio playback over
March, 1997 the Web.
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Midisoft This product provides the ability to control every aspect of X X X X X X
SOUND BAR 2.0 sound from the desktop. Users can send Audio Mail, create
Audio Notes, annotate digital pictures and video with sound
and send them through the Internet, play CDs and find any
March, 1997 sound or music file on their system instantly, all from a
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Midisoft This DVD player was created to ship with DVD card makers who X X X X X X
DVD PLAYER must have a utility to facilitate the complete control of the
video files on DVD's. It will include a wide range of
functions as well as "heads-up" display capabilities to make
April, 1997 DVD use easy to use and powerful.
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Midisoft This product features tool suites for audio editing, media X X X X
MEDIAWORKS 2.0 integration and desktop telephony. All of these features are
accessed through a graphical user interface resembling a
modern home office. In addition, it provides convenient
single click access to many of the Windows 95 utility
March, 1996 applications.
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<CAPTION>
MUSIC
PRODUCTS
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PRODUCTS DESCRIPTION MARKET INT'L CHANNELS
CONSUMER OEM
BUSINESS RETAIL
DIRECT
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<S> <C> <C> <C> <C> <C> <C> <C>
Midisoft The first Windows 95 logo'd music application. Studio X X X X X
STUDIO 4.0 features real-time notation display of MIDI input, as well as
September, 1995 innovative software and multi-track digital audio recording
and playback. MIDISOFT STUDIO includes six screen views to
STUDIO 5.0 enhance the users ability to fine tune their music, and a
JUNE, 1997 professional quality digital audio editor.
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Midisoft State of the art music publishing is the focus of SHEET X X X X X X
SHEET MUSIC MUSIC, with a user interface that will be friendly to
software novices. SHEET MUSIC features exceptional
transcription ability that takes Studio's "Realtime sheet
music" to a whole new level of excellence while Midisoft's
PERFORMANCE Sequencer-TM- technology turns Midi playback
into an experience that is as intimate and real as a live
March, 1997 band in your living room.
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Midisoft The MIDI Kit's universal MIDI connector and MIDI editor allow X X X X X
MIDI KIT 3.0 the sound card owner to transform a PC into a recording
July, 1996 studio. Cables connect the PC's sound card to a MIDI
musical instrument. Recording Session Plus provides immediate
MIDI KIT 4.0 MIDI recording, composing and editing capability, as well as
September, 1997 digital audio recording.
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Midisoft This product features a mixture of both core Midisoft X X X X X
PLAY PIANO 2.0 technologies and new proprietary technologies to create a
July, 1996 truly interactive learning experience. Lessons are created in
real-time, based on the student's needs. Any MIDI file can be
imported and Play Piano's artificial intelligence instantly
PLAY PIANO 3.0 turn it into a custom lesson for the student. The product
September, 1997 ships with 40 songs and over 400 activities.
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Midisoft This product incorporates MIDISOFT PLAY PIANO and MIDISOFT X X X X
FAMILY MUSIC STUDIO with a high quality keyboard, MIDI connector and a
CENTER Connect and Play video to become an all-in-one music
July, 1996 solution.
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Midisoft Tapedeck is a multi-track digital audio recorder for Windows X X X X X
TAPE DECK and will feature multi-track recording of CD quality digital
audio with Real-time EQ and reverberation for a target market
JULY, 1997 of non-MIDI musicians.
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Midisoft This MIDI sequencer was originally created to serve the needs X X X X
RECORDING of OEM customers. Its many features allow flexibility in
SESSION editing, recording and playback using MIDISOFT STUDIO'S
proprietary auto-notation and animated note highlighting. It
is available translated in other languages including: German,
September, 1995 French, Spanish and Japanese.
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MARKETING, SALES AND DISTRIBUTION
The principal elements of the Company's marketing, sales and distribution
strategy are as follows:
PRODUCT OFFERINGS:
CHIP MANUFACTURERS - The Company has developed enabling software to enhance
the unique functionality of chips, for example Opti and Chromatic utilize
MIDISOFT SOUND BAR and MIDISOFT AUDIO WORKS, respectively to highlight their
individual qualities.
OEMS - The Company is increasing its Strategic Product offerings from two
in 1996 to six in 1997. The OEM product offerings continue to include the music
products which are gaining in popularity as a product differentiator. All of
the products are compatible and allow the OEM a virtual menu from which to
enhance their lines of PCs.
THIRD PARTY MANUFACTURERS - Use of audio to increase product effectiveness
and marketability has allowed the Company to leverage its audio expertise into
digital camera applications with its MIDISOFT AUDIO POSTCARD and into Internet
applications with its MIDISOFT INTERNET MEDIA PLAYER.
END-USERS - Strategic products offered to end-users will be increased from
one to five and the music products will include a major upgrade to the Company's
flagship music product, MIDISOFT STUDIO and exciting new products including
MIDISOFT DESKTOP SHEET MUSIC and MIDISOFT TAPE DECK.
DISTRIBUTION:
CHIP MANUFACTURERS, OEMS, THIRD PARTY MANUFACTURERS - Distribution is
direct through the Company's OEM sales force. The Company customarily supplies
one master disk which the chip manufacturer, OEM or third party manufacturer
duplicates.
RETAIL CHANNEL - Distribution is direct through the Company's Retail
Channel Sales group which is supplemented by third party Manufacturer's
Representatives and large Distributors/Resellers. The Company has a stock-
balancing program for its retail products that, under certain circumstances,
allows for the exchange of products by resellers. The Company monitors and
manages the volume of its sales to retailers and distributors and their
inventories as substantial overstocking in the distribution channel can result
in high returns or the requirement of substantial price protection in subsequent
periods. There is also a price protection program that allows the reseller a
price reduction from the Company for unsold product. The Company believes that
it provides adequate reserves for returns and price protection which are based
on estimated future returns of products, taking into account promotional
activities, the timing of new product introductions, distributor and resellers
inventories and other factors, and that its current reserves will be sufficient
to meet return and price protection requirements for the foreseeable future.
Internationally, retail products are generally sold through republishers.
The Company has an established base within computer software retail
stores which in 1996 approximated 2,400 shelves. In 1997 the Company has
expanded its presence into the Musical Instrument ("MI") stores. The Company
currently has shelf space in two of the largest MI chains, Sam Ash and Guitar
Center, as well as prominent regional MI resellers. Although the total MI
channel approximates only 600 additional shelves. The Company believes that MI
retailers generate higher sales per store than computer software retailers.
DIRECT SALES - The Company also has an inside sales group that sells
product directly to end-users through a toll-free number listed in advertising
by the Company. This group is also responsible for targeted direct mail
marketing and sells product upgrades and accessories to registered customers.
Web sales are an increasingly important channel for the Company. It has
developed its Internet web site to promote the complete product line and conduct
secured on-line transactions. In addition, the Company has sublicensed certain
of its downloadable software products to other Internet stores such as On-line
Interactive and c / net.
CUSTOMER SUPPORT: The Company provides a high level of support across the
distribution spectrum. Support includes on-site training for OEMs and Third
Party Manufacturers, as well as on-going telephone support. In turn, these
groups provide support for their customers directly. The Company also offers
free support to end-users of its retail products.
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STRATEGIC RELATIONSHIPS: The Company has entered into arrangements with third
parties to jointly market their products with the Company's to expand
distribution capabilities while providing a more comprehensive solution to end-
users. Revenue from these relationships can be expected in the second quarter
of 1997 and beyond.
AT&T - The Company expects that AT&T will emerge as the nation's largest
Internet service provider through its WorldNet Division. The Company bundles
the WorldNet Internet access software with the MIDISOFT SOUND BAR product for
marketing and press opportunities.
KODAK - The Company includes a time-restricted version of SOUND BAR 2.0
that includes the new audio postcard drawer with Kodak's digital video camera.
STB SYSTEMS - The Company believes that STB is the number one graphics card
manufacturer in the world and the Company has created a strategic partnership to
develop a complete DVD solution for inclusion in all STB's PC DVD shipments.
As part of its sales efforts, the Company generates a marketing database of
registered users for direct mail opportunities. Further, the surveying of
current users, collation of user feedback from technical support calls, input by
OEM customers and the Company's sales force determines the features and function
of the next set of product releases in the context of the Company's own
strategic planning.
The Company markets its products principally by attending trade shows,
advertising in periodicals oriented toward retailers and end-users, Web
advertising and direct mailings. Marketing activities also focus on generating
product reviews. In 1996 SOUND BAR received positive reviews from Newsweek,
Businessweek, CNN Financial News, ABC Talk Radio and the Chicago Tribune. FAMILY
MUSIC CENTER was the top pick or runner-up within the learning software category
in Time Magazine, Parade Magazine and Family PC Magazine. Consumer exposure is
critical in new product introduction and the Company estimates that these
reviews generated over 50 million "impressions" in just the fourth quarter of
1996. Play Piano and Sound Bar captured two awards as Consumer Product of the
Year and runner-up, respectively, from the Washington Software Association for
1996.
COMPETITION
The software market for audio and music on the PC is highly competitive and
rapidly changing. The Company's competitors, many of which have greater
financial, marketing and technical resources than the Company, offer similar
products and target the same customers. The Company believes its ability to
compete depends upon many factors within and outside its control, including the
ability to offer product enhancements, functionality, performance, price,
reliability, customer support, sales and marketing efforts and distribution.
Although the Company believes it now has the products and employees to favorably
compete on the basis of these factors, there can be no assurance that
competition will not adversely affect future operating results or financial
condition
MANUFACTURING
The Company is in the process of implementing a full turn-key manufacturing
system which is expected to be complete during the second quarter of 1997. The
manufacturing process for software involves the duplication of software code
onto floppy diskettes or CD's, printing of packaging and documentation, and
assembly of the final packaged product. Manufacturing volume can generally be
increased rapidly to respond to increases in demand. To date, the Company has
not encountered any material difficulties or delays in the manufacture and
assembly of its products, and has experienced low returns due to product
defects.
9
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The Company also pursues Web sales whereby the products are downloaded directly
to the consumer, thereby eliminating manufacturing concerns. OEM sales require
the duplication of the software code onto a CD, generally referred to as a
"golden master", which the OEM duplicates in accordance with its hardware
shipments or loads directly onto the PC or card.
PROPRIETARY RIGHTS
The Company relies primarily on trade secret, trademark and copyright laws,
treaties and contractual agreements, to protect its proprietary rights. The
Company attempts to keep the results of its research and development programs
proprietary to protect its marketed software products against misappropriation
and infringement by third parties. However, there can be no assurance that the
Company will in all instances be able to prevent others from misappropriating or
infringing upon the Company's proprietary information and software products.
The Company intends to maintain the integrity of its tradename, trademarks,
copyrights and other proprietary rights against unauthorized use and to protect
against infringement and unfair competition where circumstances warrant.
Although the Company believes that its products do not infringe on any copyright
or other proprietary rights of third parties, there are currently significant
legal uncertainties relating to the application of copyright and patent law in
the field of software. The Company has no assurance that third parties will not
obtain, or do not have, patents covering features of the Company's products, in
which event the Company or its customers might be required to obtain licenses to
use such features. If a patent holder refuses to grant a license on reasonable
terms or at all, the Company may be required to alter certain products or stop
marketing them.
EMPLOYEES
The Company, as of February 28, 1997, employed 45 employees. Of these, 12 are
employed in administration, 17 in product development and 16 in sales and
marketing. All of the employees are covered by confidentiality agreements, and
no employee has an employment contract. None of the Company's employees are
represented by a union or other bargaining group. The Company believes it
maintains good employee relations.
DIVIDENDS
The Company has declared no dividends on its Common Stock since its inception.
It is the present policy of the Company to retain earnings and capital for use
in its business. Any payment of dividends on the Common Stock in the future will
be dependent upon the Company's financial condition, results of operations,
current and anticipated cash requirements, plans for expansion, restrictions, if
any, under debt obligations, as well as other factors that the Board of
Directors may deem relevant.
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, and such statements are subject to the safe harbors
created thereby. These forward-looking statements include the plans and
objectives of management for future operations, including plans and objectives
relating to (i) the development of new music and strategic software products,
(ii) the expansion of domestic and international marketing, sales and
distribution programs, (iii) the continued protection of proprietary
technologies and (iv) the ability to fund continued operations out of existing
working capital, additional capital infusion and cash flow from future
operations. The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties. These forward-
looking statements were based on assumptions that the
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Company would continue to develop and introduce new music and strategic software
products on a timely basis, that rapid changes in technology would not make the
Company's products obsolete or otherwise reduce their ability to compete in the
marketplace, that competitive conditions within the industry would not change
materially or adversely, that the use of multimedia PCs in homes and small
offices would continue to grow, that management's decision to re-focus the
Company's resources on music and sound products would reduce certain expenses
from the levels which were experienced in 1995 and 1996, and that there would be
no material adverse change in the Company's operations or business. Assumptions
relating to the foregoing involve judgments with respect to, among other things,
future economic, competitive and market conditions, and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond the control of the Company. Although the Company
believes that the assumptions underlying the forward-looking statements are
reasonable, any of the assumptions could prove inaccurate and, there can be no
assurance that the forward-looking information will prove to be accurate. In
light of the significant uncertainties inherent in the forward-looking
information included herein, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
objectives or plans of the Company will be achieved.
ITEM 2.
DESCRIPTION OF PROPERTY
The Company's principal offices are located in approximately 17,000 square feet
of office space in Issaquah, Washington which the Company leases pursuant to a
lease expiring in April 2002. The Company subleases approximately 5,700 square
feet to short-term tenants for periods of 12 to 18 months. The Company
currently receives $7,200 per month under sublease agreements. The Company
considers its leased properties to be in good condition, well maintained, and
generally suitable and adequate for its present and foreseeable future needs.
ITEM 3.
LEGAL PROCEEDINGS
On March 24, 1995 a shareholders' class action was filed against the Company and
three of the Company's former officers. The complaint, captioned as SMITH, ET
AL. V. MIDISOFT, ET AL., was filed in the United States District Court for the
Western District of Washington. The action was brought on behalf of purchasers
of the Company's Common Stock during the period April 26, 1994 to August 18,
1995, as extended. Among other things, the complaint alleged that the
defendants made various misrepresentations and/or omissions with respect to the
Company's business. On February 26, 1996 the parties entered into an agreement
pursuant to which the case was settled subject to final court approval.
Pursuant to the settlement agreement, the Company was required to pay $100,000
cash and to issue 650,000 shares of Common Stock to the plaintiffs; the Company
was also obligated to register the Common Stock under the Securities Exchange
Act of 1933 in order to allow the plaintiffs to sell the stock. The Company
filed a registration statement covering the Common Stock issued to the
plaintiffs in the fourth quarter, 1996, and is proceeding with such
registration.
The Securities and Exchange Commission ("SEC") has concluded its investigation
into the restatement of the Company's financial statements for the year ended
December 31, 1994. In anticipation of an administrative proceeding being
commenced by the SEC alleging violation of certain reporting and accounting
requirements, the Company entered into a settlement agreement with the SEC in
October 1996. Pursuant to the settlement agreement, the Company, without
admitting or denying any of the SEC's findings, was ordered to cease and desist
from permitting or causing any violation of certain reporting and accounting
requirements contained in the federal securities laws. The settlement has not
had an adverse effect on the Company's operating results or financial condition.
11
<PAGE>
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter
of the fiscal year covered by this report.
12
<PAGE>
PART II
ITEM 5. MARKET OF COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION. The Company's Common Stock is quoted on the Nasdaq National
Market under the symbol "MIDI". The following table sets forth the range of high
and low closing bid prices, as reported by Nasdaq, from January 1, 1995 through
December 31, 1996. The prices set forth reflect inter-dealer quotations, without
retail markups, markdowns or commissions, and do not necessarily represent
actual transactions. As of March 10, 1997, the number of holders of record of
the Company's Common Stock was approximately 246. Since certain of the shares of
Common Stock are held in street name, there may be additional beneficial holders
of the Company's Common Stock.
High Low
---- ---
1995
First quarter 12 1/4 8
Second quarter 9 1/4 7 1/2
Third quarter 8 1/4 4 1/2
Fourth quarter 5 1/2 2 1/4
1996
First quarter 3 1/2 1 5/8
Second quarter 9 3/8 2 3/16
Third quarter 5 7/8 3 1/4
Fourth quarter 5 1/8 2 1/8
DIVIDENDS. The Company has declared no dividends on its Common Stock since its
inception. It is the present policy of the Company to retain earnings and
capital for use in its business. Any payment of dividends on the Common Stock in
the future will be dependent upon the Company's financial condition, results of
operations, current and anticipated cash requirements, plans for expansion,
restrictions, if any, under debt obligations, as well as other factors that the
Board of Directors may deem relevant.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND NOTES THERETO.
GENERAL
The Company's revenues include sales of software and software licenses net of
sales returns. Cost of revenues includes the costs of manuals, diskettes and
duplication, packaging materials, assembly, paper goods, shipping and
amortization of software development costs.
Research and development expenses consist primarily of personnel and equipment
costs required to conduct the Company's development effort. Software development
costs are expensed as incurred, until technological feasibility is established,
after which any additional costs are capitalized until the software is available
for release to customers. Capitalized software development costs consist of
salaries and related benefits incurred in developing computer software after
technological feasibility has been established. Amortization of capitalized
software development costs begins when the related product is available for
release to customers. The Company capitalized software development costs of
approximately $331,000 in 1995. As a result of the highly competitive nature of
the software business and rapid product development life cycles, no additional
software development costs were capitalized in 1996. Purchased contract
software technology costs represent development costs incurred by contract
software engineers in developing computer software. The Company capitalized
contract software technology costs of approximately
13
<PAGE>
$1,069,000 in 1995. The Company has eliminated contract development, intending
to focus on maintaining development expertise within the Company. No
development costs were capitalized in 1996.
Revenue from products licensed to OEMs consisting of one-time license fees and
contracts for minimum advances against future unit licenses are recognized when
the criteria for fixed fee revenue recognition under Statement of Position No.
91-1 "Software Revenue Recognition" is satisfied. These criteria include, but
are not limited to, delivery of the software master, the Company's lack of other
significant obligations to the customer and a determination that the
collectability of the amount due is probable. Contracts that do not meet the
fixed fee revenue recognition criteria in SOP 91-1 are recognized as revenue on
the installment basis as payments are received. Additional royalty use or unit
copy royalty fees are recognized when they are earned pursuant to the license
agreements and upon notification of shipment from the OEMs. Revenue from sales
to distributors, other resellers and end-users is recognized when products are
shipped.
In September, 1995 the Company reduced its work force to decrease costs as its
initial step in reorganization. During the third and fourth quarters of 1995,
the Company recorded charges of $2.4 million and $1.5 million, respectively, for
restructuring associated with the Company's determination that certain software
assets were not compatible with the reorganized product strategy. In 1995, the
Company took significant steps in an attempt to reduce the negative cash flow
from operations, decreasing total personnel by 40%, subleasing a portion of its
facility, eliminating outside contractors and reducing its product line to allow
maximum effectiveness of sales personnel and marketing expenditures. During 1995
and 1996, the Company's entire research and development, marketing and sales
efforts were refocused upon the Company's core competence in sound and music.
At December 31, 1996, the Company had Federal net operating loss carryovers of
approximately $18.1 million, which expire beginning 2008. In certain
circumstances, as specified in Section 382 of the Internal Revenue Code, a 50%
or more ownership change by certain combinations 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 carryforwards.
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995
Revenues for 1996 were $3.1 million, a decrease of $2.3 million, compared to
$5.4 million in 1995. The decrease in revenues is attributed to reduced sales
during the restructuring of the Company during the first half of 1996 and weak
fourth quarter retail sales due to overall weakness in the retail channel
market. Additionally, the Company's OEM sales were focused on the July 1996
release, Sound Bar. The focus of the Company's OEM sales model has shifted to
enabling-type software rather than application software. The social interface
market weakened faster in early 1996 than anticipated leaving the Company with a
product void until the release of Sound Bar. Sales to software distributors and
resellers, together with direct sales, represented 67% and 45% of revenues for
the years ended December 31, 1996 and 1995. OEM sales represented 33% and 55%
during the same periods. International sales accounted for 19% of the Company's
revenues in 1996 compared to 17% of revenues in 1995.
Gross profit for 1996 was $1.1 million, a decrease of $1.8 million, compared to
$2.9 million for the prior year. As a percentage of revenues, gross profit
decreased to 37% in 1996 from 54% in 1995. The reduced gross profit percentage
is primarily a result of the decline in revenues which could not be offset by a
reduction in fixed costs. Further, the Company's product mix was more heavily
weighted toward the retail channel which commands lower margins due to the cost
of goods. The retail channel and the inside sales consist of boxed product that
carries a cost of goods ranging from 3% to 48% of the sales price. The cost of
OEM sales generally consists of only one master CD from which the OEM makes
replications.
Research and development expenses for 1996 were $.9 million, a decrease of $.9
million, or 47%, compared to $1.8 million for 1995. As a percentage of
revenues, research and development expenses decreased to 30% in 1996 from 33% in
1995. This decrease reflects a more narrowly defined product line, but has not
affected the ability of the Company to introduce new products.
14
<PAGE>
Sales and marketing expenses for 1996 were $3.6 million, a decrease of $484,000,
compared to $4.1 million for 1995. As a percent of revenues, sales and marketing
expenses increased to 116% in 1996 from 76% in 1995, primarily due to the
decline in revenues as well as sales and marketing efforts related to the
release of four new products in late July, 1996. The Company increased its
marketing efforts for the new products in the fourth quarter, targeting families
and other sectors of the audio market.
General and administrative expenses for 1996 were $2.4 million, a decrease of
$1.6 million, compared to $4.0 million for 1995. As a percentage of revenues,
these expenses for 1996 increased to 78% in 1996 from 74% in 1995. The decrease
is the result of reduced staffing, reduced legal costs with the settlement of
the class action suit and reduced rent due to the sublease of 30% of the
Company's office facility. The current expense represents the base levels for
the Company's general and administrative expenses.
Interest income for 1996 was $118,000, compared to $379,000 in 1995. The
decrease in interest income in 1996 reflects a decrease in the amount of cash
available for investments in 1996 due to use of cash in operations.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company's principal sources of liquidity included
cash and cash equivalents of $709,000 and net accounts receivable of $1.3
million. The Company has had no long-term debt since inception, and the Company
has no present commitments or agreements that could require any long-term debt
to be incurred. As of December 31, 1996, working capital totaled $1.4 million.
The Company's operating activities used cash of $4.1 million for the year ended
December 31, 1996 due primarily to operating losses of $5.7 million.
Current assets decreased $3.6 million to $3.2 million at December 31, 1996
from $6.8 million at the end of 1995. The decrease was due to the
utilization of cash in operations and the reduction of accounts receivable
due to a reduction of the days sales outstanding and the decrease in overall
sales. Long term assets decreased $0.9 million to $0.9 million at December
31, 1996 from $1.8 million at the end of 1995. This decrease was due to the
amortization of capitalized software costs. Current liabilities decreased
$1.5 million to $1.8 million at December 31, 1996 from $3.3 million at the
end of 1995. The decrease was due to the settlement of the class action law
suit for which $100,000 in cash and $1.5 million in common stock were
distributed during 1996. Shareholders' equity decreased $3.0 million to $2.3
million at December 31, 1996 from $5.3 million at the end of 1995. The
change in equity had three components, an increase of $1.1 million from the
issuance of Preferred stock, a $1.5 million increase in Common stock to
settle the class action lawsuit, and a decrease of $5.7 million from the net
loss generated in 1996.
Cash from investing activities totaled $1.5 million in 1996, mainly as the
result of redemption of short term investments. The Company designated 1,100
shares of Preferred Stock as Series A Convertible Preferred Stock (the "Series A
Preferred Stock"). All 1,100 shares were issued at a price of $1,000 per share
in an offshore private placement completed in October, 1996.
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.
15
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
REPORT OF PRICE WATERHOUSE LLP, INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of Midisoft Corporation
In our opinion, the accompanying balance sheets and the related statements of
operations and shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of Midisoft at December 31, 1995
and the results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, accessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provide a
reasonable basis for the opinion expressed above.
Price Waterhouse, LLP
Seattle, Washington
March 27, 1996
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders of Midisoft Corporation
We have audited the accompanying balance sheet of Midisoft Corporation as of
December 31, 1996 and the related statement of operation, shareholders' equity,
and cash flow for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1996 financial statements referred to above present fairly,
in all material respects, the financial position of Midisoft Corporation at
December 31, 1996 and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1,
the Company has incurred recurring losses from operations and has negative
operating cash flows. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The financial
statements do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the amounts and
classifications of liabilities that may result from the outcome of this
uncertainty.
Seattle, Washington Ernst & Young LLP
March 13, 1997
16
<PAGE>
MIDISOFT CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
Year ended December 31,
-----------------------------------
1996 1995
--------------- ---------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 709,000 $ 2,143,000
Short term investments 1,540,000
Accounts receivable - net of allowances of
$1,052,000 in 1996 and $1,550,000 in 1995 1,282,000 2,329,000
Inventories 942,000 494,000
Prepaid expenses and other receivable 282,000 266,000
--------------- ---------------
Total current assets 3,215,000 6,772,000
Property & equipment, net 421,000 562,000
Capitalized software and other costs, net 455,000 1,230,000
--------------- ---------------
Total assets $ 4,091,000 $ 8,564,000
--------------- ---------------
--------------- ---------------
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 691,000 $ 429,000
Accrued wages & payroll taxes 186,000 260,000
Other accrued expenses 118,000 1,804,000
Deferred revenue 821,000 807,000
--------------- ---------------
Total current liabilities 1,816,000 3,300,000
--------------- ---------------
Commitments & contingencies (Note 14)
Shareholders' equity
Preferred stock, Series A Convertible, no par value; 2,500,000 shares
authorized, 1,100 shares issued and outstanding in 1996 and
none in 1995 1,100,000
Common stock, no par value; 10,000,000 shares authorized,
5,345,425 issued and outstanding in 1996 and
4,662,441 issued and outstanding in 1995 18,733,000 17,106,000
Retained deficit (17,558,000) (11,842,000)
--------------- ---------------
Total shareholders' equity 2,275,000 5,264,000
--------------- ---------------
Total liabilities and shareholders' equity $ 4,091,000 $ 8,564,000
--------------- ---------------
--------------- ---------------
</TABLE>
See accompanying notes to financial statements.
17
<PAGE>
MIDISOFT CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
1996 1995
--------------- ---------------
<S> <C> <C>
Revenues $ 3,113,000 $ 5,420,000
Cost of revenues 1,971,000 2,490,000
--------------- ---------------
Gross profit 1,142,000 2,930,000
Operating expenses:
Sales and marketing 3,613,000 4,097,000
General and administrative 2,421,000 4,015,000
Research and development 942,000 1,787,000
Restructuring charge 3,898,000
Settlement of shareholder litigation 1,644,000
--------------- ---------------
Total operating expenses 6,976,000 15,441,000
--------------- ---------------
Operating loss (5,834,000) (12,511,000)
Interest and other income 118,000 379,000
--------------- ---------------
Net loss $ (5,716,000) $ (12,132,000)
--------------- ---------------
--------------- ---------------
Net loss per share $ (1.22) $ (2.60)
--------------- ---------------
--------------- ---------------
Weighted average shares outstanding 4,687,000 4,665,000
--------------- ---------------
--------------- ---------------
</TABLE>
See accompanying notes to financial statements.
18
<PAGE>
MIDISOFT CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
1996 1995
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net loss $ (5,716,000) $ (12,132,000)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 222,000 204,000
Amortization 780,000 948,000
Loss on disposal of leasehold 16,000
Deferred rent provision 65,000
Writedown of capitalized software 3,898,000
Settlement of litigation 150,000
(INCREASE) DECREASE IN ASSETS:
Accounts receivable, net 1,047,000 1,515,000
Inventories (448,000) 185,000
Prepaid expenses (16,000) 15,000
Deferred income taxes 283,000
INCREASE (DECREASE) IN LIABILITIES:
Trade accounts payable 262,000 (38,000)
Accrued wages & payroll taxes (74,000) 120,000
Other accrued expenses (142,000) 1,624,000
Deferred income taxes - (291,000)
Deferred revenue 14,000 22,000
--------------- ---------------
Total adjustments 1,645,000 8,716,000
--------------- ---------------
Net cash used for operations (4,071,000) (3,416,000)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Redemption of short term investments 1,540,000
Purchases of short term investments (1,540,000)
Purchases of property & equipment (86,000) (407,000)
Capitalized software - (2,384,000)
--------------- ---------------
Net cash provided by/(used in) investing activities 1,454,000 (4,331,000)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock option exercises 83,000 306,000
Proceeds from sale of preferred stock 1,100,000
Stock repurchased (17,000)
--------------- ---------------
Net cash provided by financing activities 1,183,000 289,000
--------------- ---------------
Net decrease in cash and cash equivalents (1,434,000) (7,458,000)
Cash and cash equivalents, beginning of year 2,143,000 9,601,000
--------------- ---------------
Cash and cash equivalents, end of period $ 709,000 $ 2,143,000
--------------- ---------------
--------------- ---------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Common stock issued for purchase of other assets $ - $ 1,991,000
Common stock and stock options issued in settlement of claims 1,544,000 150,000
Income taxes paid - 2,000
</TABLE>
See accompanying notes to financial statements.
19
<PAGE>
MIDISOFT CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained Total
Common Stock Preferred Stock (Deficit) Shareholders'
Shares Amount Shares Amount Earnings Equity
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 4,262,000 $ 14,676,000 - - $ 290,000 $ 14,966,000
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Common stock repurchased (53,000) (17,000) (17,000)
Common stock issued 195,000 1,991,000 1,991,000
Stock options exercised 258,000 456,000 456,000
Net loss for 1995 (12,132,000) (12,132,000)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 4,662,000 17,106,000 - - (11,842,000) 5,264,000
- -----------------------------------------------------------------------------------------------------------------------------------
Stock options exercised 33,000 83,000 83,000
Common stock issued in settlement
of litigation 650,000 1,544,000 1,544,000
Preferred stock issued 1,100 $ 1,100,000 1,100,000
Net loss for 1996 (5,716,000) (5,716,000)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 5,345,000 $ 18,733,000 1,100 $ 1,100,000 $ (17,558,000) $ 2,275,000
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
20
<PAGE>
MIDISOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. THE BUSINESS
Midisoft is a leading provider of innovative applications and utilities for
the control and use of sound on personal computers. The Company was
founded in 1986 and has pioneered 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. As new
technologies evolve, the Company believes it can continue to be the
premiere provider of audio control expertise. The Company markets its
products on a worldwide basis to (i) chip makers and 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 (ii) end-users, catalog
companies, businesses and (iv) on-line Internet sales.
GOING CONCERN AND LIQUIDITY
The Company incurred substantial operating losses during each of the two
years ended December 31, 1996. The financial statements have been prepared
assuming the Company will continue as a going concern and do not include
any adjustments to reflect the possible future effects on the
recoverability and classification of assets and liabilities that may result
from this uncertainty.
The Company has required substantial working capital to fund its
operations. To date, the Company has financed its operations principally
through the net proceeds from its initial public offering and other
equity transactions. The Company's ability to continue as a going concern
is dependent upon numerous factors, including its ability to obtain
additional equity financing, the level of future revenues and its ability
to reduce operating expenses. The Company is actively pursuing possible
sources of additional working capital through the issuance of equity
securities. The Company has received proposals from investors which would
provide additional working capital, although each of these proposals is
subject to a number of conditions. There can be no assurance that the
Company would be able to obtain additional equity financing on terms the
Company finds acceptable. Any additional equity may involve substantial
dilution to the interests of holders of the Company's equity securities.
If the Company is unable to obtain sufficient funds to satisfy its cash
requirements, it may be forced to curtail operations, dispose of assets or
seek extended payment terms from its vendors. There can be no assurance
that the Company would be able to reduce expenses or successfully complete
other steps necessary to continue as a going concern. Such events would
materially and adversely affect the value of the Company's equity
securities.
2. SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenue from products licensed to OEMs consisting of one-time license fees
and contracts for minimum advances against future unit licenses are
recognized when the criteria for fixed fee revenue recognition under
Statement of Position No. 91-1, SOFTWARE REVENUE RECOGNITION, are
satisfied. These criteria include, but are not limited to, delivery of the
software master, the Company's lack of other significant obligations to the
customer and a determination that collectability of the amount due is
probable. Revenues on contracts which do not meet the fixed fee revenue
recognition criteria in SOP 91-1 are included in deferred revenue in the
accompanying balance sheet and are recognized as revenue on the installment
basis as payments are received. Additional royalty use or unit copy
royalty fees are recognized when they are earned pursuant to the license
agreements and upon notification of shipment and payment from the OEMs.
Revenue from sales to distributors, other resellers and end-users net of a
provision for anticipated returns, is recognized when the products are
shipped. The allowance for returns is evaluated each quarter taking into
consideration, among other things, known return requests from distributors,
anticipated return requests based on the distributor's rate of product
sale, returns due to product upgrades and historical distributor return
patterns.
WARRANTIES AND RETURNS
The Company warrants products against defects and has policies permitting
the return of products under certain circumstances. The Company's
distributor agreements provide for sales returns, stock rotation,
cooperative advertising and price protection. Customers are granted price
protection for a period of up to 60 days after the Company reduces the
price of a product. The Company considers all of the above factors in
determining the adequate allowance against these sales.
ADVERTISING COSTS
The Company generally provides for cooperative advertising at agreed-upon
rates. Advertising costs, included in sales and marketing expenses, are
expensed as incurred and were $783,000 and $906,000 for the year ended
December 31, 1996 and 1995, respectively.
RESEARCH AND DEVELOPMENT
Software development costs incurred in conjunction with new software
product development and product enhancements are charged to research and
development expense. Prior to 1996, certain costs, consisting of salaries
and related benefits, incurred internally in developing computer software
were
21
<PAGE>
capitalized until the software was available for general release.
Amortization of capitalized software development costs began when the
related product was available for general release to customers. The
amortized amount for each software product was based on the greater of (i)
the ratio of current gross revenues to total current and anticipated future
gross revenues for the related software or (ii) the straight-line method
over the product's estimated economic life of 18 to 24 months.
INCOME TAXES
The Company provides for income taxes under the principles of Statement of
Financial Accounting Standards No. 109 (SFAS 109) which requires that
income taxes be provided for taxes currently due and for the expected
future tax effects of the temporary differences between the book and tax
bases of assets and liabilities.
NET LOSS PER SHARE
Net loss per share is computed on the basis of the weighted average number
of shares of common stock outstanding during the period. Common stock
equivalents are antidilutive.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less at the date of purchase to be cash equivalents.
Short-term investments classified as cash equivalents are stated at the
lower of cost or market, which approximates fair value.
SHORT-TERM INVESTMENTS
There were no realized or unrealized gains or losses on short-term
investments for the years ended December 31, 1996 and 1995. All short-term
investments are debt instruments that mature within one year, and are
stated at cost, which approximates fair value.
INVENTORIES
Inventories are valued at the lower of cost or market using the first-in,
first-out method. The Company continuously reviews it inventories for
obsolete, slow moving and non-salable items and establishes a reserve for
such items.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost less accumulated depreciation
and amortization, and are depreciated using the straight-line method over
the estimated useful lives of the related assets, which range from three to
seven years. Leasehold improvements are amortized over the term of the
lease.
CONCENTRATION OF CREDIT RISK/FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of accounts receivable, for
which collateral is generally not required. The Company's trade
receivables include amounts due from U.S. and foreign customers in the
computer software and hardware industry and are derived from sales of
products, OEM licensing fees and unit royalties. The Company performs
ongoing credit evaluations of its customers' financial condition and limits
its exposure to losses by limiting the amount of credit extended whenever
deemed necessary.
The carrying values of cash equivalents and short-term investments and
other assets and liabilities (such as accounts receivable and payable)
approximate fair value at December 31, 1996 and December 31, 1995.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
22
<PAGE>
STOCK COMPENSATION
The Company has elected to apply the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for stock
Based Compensation." Accordingly, the Company accounts for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Compensation cost for stock
options is measured as the excess, if any, of the fair market value of the
Company's common stock at the date of grant over the exercise price.
3. RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the
current year presentation.
4. RESTRUCTURING OF OPERATIONS
During the third and fourth quarters of 1995, the Company recorded charges
of $2,369,000 and $1,529,000, respectively, for restructuring associated
with the Company's determination that certain software assets were not
compatible with the reorganized product strategy. The charges consists of
the write-down of previously capitalized software development costs. The
Company's entire research and development, marketing and sales efforts were
refocused upon the Company's core competence in sound and music. Products
that represented education, entertainment and business were written off as
it was determined that no further internal resources would be spent to
develop or promote them. The Company has established licensing agreements
for these products to third party publishers for per unit royalty payments.
5. ACCOUNTS RECEIVABLE AND MAJOR CUSTOMER INFORMATION
The Company operates in a single business segment. During the years ended
December 31, 1996 and 1995, the Company had revenue from foreign customers
of $603,000 and $944,000, respectively. Foreign sales as a percentage of
the Company's total revenue in 1996 and 1995 were 19% and 17%,
respectively. In 1996 and 1995 separate domestic reseller customers
accounted for revenues of $2,071,000 and $2,255,000, respectively, equal to
67% and 42% of the Company's total revenue in the periods.
Accounts receivable are summarized as follows:
1996 1995
---- ----
OEM $ 1,600,000 $ 2,398,000
Resellers and other 734,000 1,481,000
-------------- --------------
Subtotal 2,334,000 3,879,000
Less: Allowance for doubtful accounts (781,000) (1,120,000)
Allowance for sales returns (271,000) (430,000)
-------------- --------------
Total accounts receivable $ 1,282,000 $ 2,329,000
-------------- --------------
-------------- --------------
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 December 31,
1996 and 1995, OEM accounts receivable amounts not yet due were $173,000
and $971,000, equal to 11% and 40%, respectively, of total OEM receivables.
At December 31, 1996 and 1995, reseller accounts receivable amounts not yet
due were $154,000 and $421,000 equal to 21% and 28%, respectively, of total
reseller receivables.
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.
23
<PAGE>
Domestic customers comprise $1,540,000 and $2,769,000 of accounts
receivable at December 31, 1996 and 1995, respectively. Foreign customers
comprised $794,000 of accounts receivable at December 31, 1996 compared to
$1,110,000 at December 31, 1995.
6. INVENTORIES
Inventories are summarized as follows:
December 31,
------------
1996 1995
---- ----
Raw materials $ 760,000 $ 455,000
Finished goods 287,000 284,000
Less: Allowance for obsolescence (105,000) (245,000)
-------------- --------------
Total inventory $ 942,000 $ 494,000
-------------- --------------
-------------- --------------
7. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
December 31,
------------
1996 1995
---- ----
Equipment $ 917,000 $ 839,000
Furniture 81,000 79,000
Leasehold improvement 30,000 23,000
-------------- --------------
Property and equipment, at cost 1,028,000 941,000
Less: Accumulated depreciation (599,000) (376,000)
Accumulated amortization (8,000) (3,000)
-------------- --------------
Property and equipment, net 421,000 562,000
-------------- --------------
-------------- --------------
8. CAPITALIZED SOFTWARE AND OTHER COSTS
Capitalized software and other costs are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
Purchased software technology, net of accumulated amortization of
$412,000 and $177,000, respectively, in 1996 and 1995 $ 193,000 $ 428,000
Purchased contract software technology, net of accumulated amorti-
zation of $380,000 and $131,000, respectively, in 1996 and 1995 115,000 364,000
Capitalized software development costs, net of accumulated amorti-
zation of 430,000 and $139,000, respectively, in 1996 and 1995 147,000 438,000
------------- -------------
Total capitalized software $ 455,000 $ 1,230,000
------------- -------------
------------- -------------
</TABLE>
PURCHASED SOFTWARE TECHNOLOGY
The Company purchased software technology from various sources during 1995.
The estimated useful lives of the remaining product costs range from
eighteen months to two years. Amortization expense related to purchased
software technology for the years ended December 31, 1996 and 1995 was
$235,000 and $561,000, respectively.
PURCHASED CONTRACT SOFTWARE TECHNOLOGY
24
<PAGE>
Purchased contract software technology costs represent contract software
development costs incurred for work performed by external contract software
engineers in developing computer software. Amortization expense related to
purchased contract software technology was $249,000 and $111,000 for 1996
and 1995, respectively.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Capitalized software development costs represent software product
development and product enhancements consisting of salaries and related
benefits, incurred internally in developing computer software after
technological feasibility has been established. Amortization expense
related to capitalized software development costs was $291,000 and $148,000
for 1996 and 1995, respectively.
9. BANK CREDIT LINE FACILITY
The Company has a bank line of credit facility, from U.S. Bank of
Washington. Pursuant to the terms of the agreement, the Company may borrow
on a secured basis up to $3,000,000 at the bank's prime rate and up to
$120,000 on corporate bank cards. The credit facility has a 1/4%
commitment fee, matures May 31, 1997. At December 31, 1996, no amount was
drawn on either credit facility.
10. OTHER ACCRUED EXPENSES
The following table summarizes the components of the other current
liabilities:
December 31,
------------
1996 1995
---- ----
Shareholder litigation settlement $ - $ 1,644,000
Other accrued expenses 118,000 160,000
-------------- --------------
$ 118,000 $ 1,804,000
-------------- --------------
-------------- --------------
The shareholder litigation settlement is comprised of 650,000 shares of the
Company's common stock which were issued in the fourth quarter of 1996.
The cash payment portion of the settlement in the amount of $100,000 was
made in May, 1996.
11. INCOME TAXES
There is no provision for income taxes for the years ended December 31,
1996 and 1995 due to the net loss incurred.
The components of deferred income taxes are summarized as follows:
25
<PAGE>
December 31,
------------
1996 1995
---- ----
Deferred income tax assets
Net operating losses 6,152,000 3,861,000
Accrued liabilities and allowances 403,000 1,193,000
Capitalized software 226,000
Other 214,000 72,000
-------------- --------------
6,995,000 5,126,000
Deferred income tax liabilities
Capitalized software (482,000)
Other (6,000)
Valuation allowance (6,989,000) (4,644,000)
-------------- --------------
Net deferred tax liabilities - -
-------------- --------------
-------------- --------------
At December 31, 1996, the Company had net operating losses of $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 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.
12. SHAREHOLDERS' EQUITY
In 1996, the Company's Board of Directors designated 1,100 shares of
Preferred Stock as Series A Convertible Preferred Stock (the "Series A
Preferred Stock"). All 1,100 shares were issued at a price of $1,000 per
share in an offshore private placement completed in October, 1996. The
Series A Preferred Stock is convertible at the holder's option into shares
of Common Stock at a price which is equal to the lesser of 85% of the
closing bid as of the date of conversion or 100% of the closing bid price
of the Common Stock as of the date of issuance of the Series A Preferred
Stock. The Series A Preferred Stock is also subject to mandatory
conversion two years after its date of issuance based upon the conversion
formula described above. Holders of the Series A Preferred Stock are
entitled to an 8% cumulative dividend payable in cash or Common Stock, at
the holder's option, at the time of conversion. Holders of Series A
Preferred Stock are entitled to one vote for each share of stock held.
During 1995, the Company repurchased from one of the co-founders, 53,000
shares of common stock for $17,000 under the Founders' buy-sell agreement.
At December 31, 1996, the Company has reserved the following shares of
Common Stock:
Warrants 163,000
Stock Options 896,936
WARRANTS
In connection with the July 26, 1994 and the July 19, 1993 public stock
offerings, the Company has agreed to issue and sell to the Underwriter
Representatives, for nominal consideration, warrants to purchase an
aggregate of 38,000 and 100,000 shares of common stock, respectively, at a
price of $12.90 and $4.20, respectively. The warrants expire in 1998.
In connection with the October, 1996 sale of Series A Preferred Stock, the
Company is also obligated to issue one warrant (the "Warrant") with respect
to each share of Common Stock which is issued. Each Warrant will entitle
the holder to purchase one share of common stock at a price equal to $8.50
per share.
26
<PAGE>
The Warrants shall be exercisable for two years. Additionally, the Company
has agreed to issue and sell to the Placement Agent, warrants to purchase
25,000 shares of common stock at a price of $6.00 per share.
STOCK OPTION PLAN
The Company has adopted a 1989 Stock Option Plan (the Plan), as amended
September 28, 1994, to provide for the granting of both Incentive Stock
Options (ISOs) and Nonqualified Stock Options for employees, directors and
consultants of the Company to acquire ownership in the Company and provide
them with incentives for their service.
Under the terms of the Plan, 1,350,000 shares of common stock may be
issued. The Plan is currently administered by the Option Committee of the
Board of Directors which determines the terms and conditions of the options
granted under the Plan, including exercise price, number of option shares
granted and the vesting period of such options. Upon termination of a
participant's employment or consulting relationship with the Company,
unvested options terminate and are no longer exerciseable and vested
options remain exerciseable for a period not to exceed three months. The
exercise price of all ISOs granted under the Plan must be at least equal to
the fair market value of the common stock of the Company on the date of
grant and the term may not exceed five years. The exercise price of all
ISOs granted under the Plan are determined by the Option Committee and the
term may not exceed ten years.
At December 31, 1996 and 1995, options for 160,000 and 79,000 shares,
respectively, of common stock were exercisable and options for 195,000 and
347,000 shares, respectively, of common stock were available for future
grants under the Plan.
Activity with respect to the Stock Option Plan is as follows:
Weighted Average
Shares Exercise Price
------ --------------
Options outstanding, December 31, 1994 757,504 $5.03
Granted 504,764 $5.52
Exercised (258,437) $1.19
Canceled (421,291) $6.50
Options outstanding, December 31, 1995 582,540 $2.48
Granted 401,514 $2.89
Exercised (32,984) $2.54
Canceled (249,134) $2.68
Options outstanding, December 31, 1996 701,936 $2.64
The following table summarizes information about fixed-price options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Weighted-
Average Weighted- Weighted-
Range of Options Remaining Average Options Average
Exercise Prices Outstanding Contractual Life Exercise Price Exerciseable Exercise Price
--------------- ----------- ---------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
$0.10 - $2.50 154,922 8.20 $ 2.11 24,922 $ 0.10
$2.56 - $2.56 380,573 8.89 $ 2.56 124,887 $ 2.56
$2.75 - $8.19 166,441 9.40 $ 3.30 10,191 $ 2.75
----------- -----------
$0.10 - $8.19 701,936 8.86 $ 2.64 160,000 $ 2.19
</TABLE>
The Company follows the intrinsic value method in accounting for its stock
options. Had compensation cost been recognized on the fair value at the
grant date for options awarded under the Plan, the pro forma
27
<PAGE>
amounts of the company's net loss and net loss per share for the years
ended December 31, 1996 and 1995 would have been as follows:
1996 1995
---- ----
Net loss as reported $ (5,716,000) $ (12,132,000)
--------------- -----------------
--------------- -----------------
Net loss pro forma $ (6,613,000) $ (12,882,000)
--------------- -----------------
--------------- -----------------
Loss per share as reported $ (1.22) $ (2.60)
--------------- -----------------
--------------- -----------------
Loss per share pro forma $ (1.41) $ (2.76)
--------------- -----------------
--------------- -----------------
The fair value of each option grant was estimated using the Black-Scholes
option-pricing model with the following weighted average assumptions: risk-
free interest rates of 4.74% to 8.34%; expected option life of five years;
expected volatility of 1.17%; and no expected dividends. The weighted-
average fair value of options granted during the years 1996 and 1995 was
$2.88 and $3.61, respectively.
13. LICENSE AGREEMENTS
The Company has license agreements with various developers and producers of
computer software which require the Company to pay royalties. During the
years ended December 31, 1996 and 1995, total royalty costs were $48,000
and $195,000, respectively.
14. COMMITMENTS AND CONTINGENCIES
The Company leases office facilities and a warehouse for its operations.
The leases contain renewal and expansion provisions, exerciseable at the
discretion of the Company. The Company's leases include scheduled rent
increases over the term of the lease. The total payment amount is being
recognized to expense on a straight-line basis over the term of the lease.
Future minimum lease rental commitments for all non-cancelable operating
leases are summarized as follows:
YEAR
1997 $ 270,000
1998 271,000
1999 273,000
2000 73,000
------------
$ 887,000
------------
------------
Rent expense for 1996 and 1995 was $263,000 and $191,000, respectively.
The Company received $69,000 from sublease income for 1996. There was no
sublease income in 1995.
The Company is subject to various claims and lawsuits in the ordinary
course of business. In the opinion of management, the ultimate resolution
of these matters will not have a material adverse effect on the Company's
financial condition, results of operations or cash flows.
15. EMPLOYEE BENEFIT PLANS
In June 1996, the Company adopted a qualified profit-sharing plan under the
provisions of Internal Revenue Code 401(k). The plan is available to all
employees meeting the eligibility requirements.
28
<PAGE>
Contributions by the Company are based on a matching formula as defined in
the plan. The Company made no contributions to the plan in 1996.
29
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
1. Previous independent accountants.
(i) Midisoft Corporation (the "Company") dismissed Price Waterhouse LLP
(the "Former Accountants") as its independent accountants on January
2, 1997.
(ii) The Former Accountants reported on the Company's financial
statements for the fiscal years ended October 31, 1994 and 1995.
The reports of the Former Accountants on the financial statements
for such years contained no adverse opinion or disclaimer of opinion
and were not qualified or modified as to uncertainty, audit scope or
accounting principles.
(iii) The Company's Board of Directors approved the dismissal of the
Former Accountants and the selection of Ernst & Young LLP as the
Company's new accountants.
(iv) Except as described below, during the Company's fiscal years ended
December 31, 1994 and 1995, and through the date of this report,
there were no disagreements with the Former Accountants on any
matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if
not resolved to the satisfaction of the Former Accountants would
have caused them to make reference thereto in their report on the
financial statements for such years. In connection with their audit
of the Company's financial statements for fiscal year 1994, the
Former Accountants advised the Company and the Company's former
management that they disagreed with the Company recognizing revenue
for certain OEM contracts. The disagreement was discussed by the
Former Accountants with the Company's former management and with the
Company's Board of Directors and the matter was resolved to the
Former Accountant's satisfaction.
Except as described below, during the fiscal years ended December 31,
1994 and 1995 and through the date of this report, the Former
Accountants did not advise the Company with respect to the matters
described in paragraphs (a) (1) (vi) (B) (1) through (3) of Item 304
of Regulation S-B. In connection with the Former Accountants' audit
of the Company's financial statements for fiscal year 1994 subsequent
to original issuance of the financial statements, information came to
the attention of the Former Accountants which caused them to perform
additional procedures which resulted in their unwillingness to rely
upon the representations of the Company's former management regarding
the December 31, 1994 financial statements, and to expand the scope of
their audit work. These matters were discussed with the Company's
former management and the Company's Board of Directors. The Former
Accountants' further audit work led to a restatement of the Company's
financial statements for the year ended December 31, 1994 to reverse
certain revenue previously recognized in the Company's 1994 financial
statements in a manner satisfactory to the Former Accountants. The
Former Accountants also advised the Board of Directors and former
management of matters considered to be reportable conditions related
to internal accounting controls under standards established by the
AICPA. These matters related to the Company's policies and procedures
for recognizing revenue in its financial statements. The Company's
current management has adopted and implemented additional internal
accounting controls to address these matters, and the Former
Accountants have not issued any subsequent reports to the Company
which include reportable conditions.
Each of the events described in this report occurred prior to the
appointment of the Company's existing executive officers. In
particular, the Company's executive officers at the time of each of
the events described herein consisted of Raymond Bily, Chairman;
Ronald Risdon, President; and Calvin Dyer, Chief Financial Officer.
30
<PAGE>
The Company has authorized the Former Accountants to respond fully to
any inquiries of Ernst & Young LLP concerning the subject matter of
the events described above.
2. The Registrant engaged Ernst & Young LLP as its new independent
accountant effective January 2, 1997. During the two fiscal years
preceding its appointment and through the date hereof, the Company had
not consulted with Ernst & Young LLP on items regarding:
i) The application of accounting principles to a specific completed or
contemplated transaction, or the type of audit opinion that might be
rendered on the Company's financial statements; there was no written
or oral advice provided that was an important factor in reaching a
decision as to any account, auditing or financial reporting issue; or
ii) Any matter that was the subject of a disagreement or event required to
be identified pursuant to paragraph (a) (1) (iv) of Item 304 of
Regulation S-B.
3. The Company has provided the Former Accountants with a copy of the
foregoing disclosures and has requested in writing that the Former
Accountants furnish it with a letter addressed to the SEC stating
whether or not it agrees with such disclosures. A copy of such letter
is filed as an exhibit to the Company's Form 8-K filed on January 2,
1997.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Item 9 is hereby incorporated by reference to the information in the
Company's Proxy Statement relating to its 1996 annual meeting of
Shareholders prepared in accordance with Section 14(a) of the
Securities and Exchange Act of 1934, as amended (the "Proxy
Statement").
ITEM 10. EXECUTIVE COMPENSATION
Item 10 is hereby incorporated by reference to the information in the Proxy
Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Item 11 is hereby incorporated by reference to the information in the Proxy
Statement.
31
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 12 is hereby incorporated by reference to the information in the Proxy
Statement.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS: The following are filed as a part ITEM 5.
of this report under Financial Statements
Page
Report of Ernst & Young LLP. . . . . . . . . . . . . . . . . 16
Report of Price Waterhouse LLP . . . . . . . . . . . . . . . 16
Balance Sheets - At December 31, 1996 and 1995 . . . . . . . 17
Income Statements - For the Years Ended December 31,
1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . 18
Statements of Cash Flows - For the Years Ended
December 31, 1996 and 1995 . . . . . . . . . . . . . . . . 19
Statements of Shareholders' Equity - For the Years
Ended December 31, 1996 and 1995 . . . . . . . . . . . . . 20
Notes to Financial Statements - For the Years
Ended December 31, 1996 and 1995 . . . . . . . . . . . . . 21
(a) REPORTS ON 8-K.
Change in Accountants filed January 2, 1997
(b) EXHIBITS. The following exhibits are filed as part of this report:
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1.1 (a) Articles of Incorporation of the Company as filed on
September 23, 1986 with the Secretary of State of the
State of Washington.
3.1.2 (b) Articles of Amendment to Articles of Incorporation of the
Company as filed on February 22, 1989 with the Secretary
of State of the State of Washington.
3.1.3 (b) Articles of Amendment to Articles of Incorporation of the
Company as filed on July 13, 1994 with the Secretary of
State of the State of Washington.
3.2.1 (b) By-laws of the Company.
3.2.2 (a) Amended and Restated By-laws of the Company.
4.1 (b) Form of specimen certificate for Common Stock of the
Company.
4.2 (f) Designation of Rights and Preferences of Series A
Convertible Preferred Stock.
4.3 (f) Designation of Rights and Preferences of Series A
Convertible Preferred Stock.
10.1.1 (b) Employment Agreement, dated December 31, 1991, as further
amended on May 5, 1994, by and between Raymond Bily and
the Company.
10.1.2 (b) Employment Agreement, dated March 1, 1991, as further
amended on May 5, 1994, by and between Ronald E. Risdon
and the Company.
10.1.3 (b) Employment Agreement, dated May 15, 1991, as further
amended on May 5, 1994, by and between Jerry W. Schwartz
and the Company.
10.1.4 (c) Employment Agreement, dated July 19, 1994, by and between
Calvin M. Dyer and the Company.
10.2 (b) Combined Incentive and Nonstatutory Stock Option Plan,
adopted February 22, 1989, and as amended April 30, 1994
and September 28, 1994, authorizing 1,200,000 shares of
Common Stock for issuance pursuant to the combined Plan.
32
<PAGE>
EXHIBIT NO. DESCRIPTION
----------- -----------
10.5.1 (b) Industrial Lease, dated January 28, 1992, by and between
the Teachers Insurance and Annuity Association of America,
as landlord, and the Company, as tenant.
10.5.2 (c) Industrial Leases, dated July 9, 1994, by and between
Teachers Insurance and Annuity Association of America, as
landlord, and the Company, as tenant.
10.5.3 (c) Amendment to Industrial Leases, dated February 15, 1994,
by and between Teachers and Annuity Association of
America, as landlord, and the Company, as tenant.
10.5.4 (d) Industrial Lease, dated March 9, 1995, by and between I-90
Lake Place II Limited Partnership, as landlord, and the
Company, as tenant.
10.6.1 (b) Software License Agreement, dated June 4, 1994, by and
between Music Technology Associates and the Company.
10.6.2 (b) Software Rights Purchase Agreement, dated May 5, 1994, by
and between Music Technology Associates and the Company.
10.6.3 (c) Software License Agreement, dated August 6, 1994 by and
between Dennis McMahon d/b/a Asystem, and the Company.
10.6.4 (a) Software Purchase Agreement, dated April 15, 1994 by and
between Dennis McMahon d/b/a Asystem, and the Company.
10.6.5 (d) Software Purchase Agreement, dated November 10, 1994 by
and between Dennis McMahon d/b/a Asystem, and the Company.
33
<PAGE>
EXHIBIT NO. DESCRIPTION
----------- -----------
10.6.6 (d) Software Purchase Agreement, dated December 22, 1994 by
and between Dennis McMahon d/b/a Asystem, and the Company.
10.7.1 (b) Reseller Agreement, dated January 3, 1992, by and between
WestPoint Creative Ltd. and the Company.
10.7.2 (b) Reseller Agreement, dated December 31, 1991, by and
between CPS Computer Distribution GmbH and the Company.
10.7.3 (b) Reseller Agreement, dated February 13, 1992, by and
between Walop Electronics B.V. and the Company.
10.8.1 (b) Distribution Agreement, dated August 26, 1992, by and
between Merisel, Inc. and the Company.
10.8.2 (b) Distribution Agreement, dated July 14, 1992, by and
between Ingram Micro Inc. and the Company.
10.9.1 (b) OEM License Agreement, dated August 26, 1992, by and
between MPC (Distribution) Ltd. and the Company.
10.9.2 (b) OEM License Agreement, dated January 8, 1994, by and
between Ad Lib Multimedia Inc. and the Company.
10.9.3 (b) OEM License Agreement, dated October 26, 1994 by and
between Media Vision Corporation
10.9.4 (b) Form of OEM License Agreement between various OEM
licensees and the Company.
10.9.5 (a) OEM License Agreement, dated May 10, 1994, by and between
International Business Machines and the Company.
10.9.6 (a) OEM License Agreement, dated May 17, 1994, by and between
Gateway 2000 and the Company.
10.9.7 (a) OEM License Agreement, dated May 20, 1994, by and between
ASCII Corporation and the Company.
10.9.8 (a) OEM License Agreement, dated May 20, 1994, by and between
I-O Data Devices and the Company.
10.9.9 (e) OEM License Agreement, dated March 6, 1995, by and between
Genoa Systems Corporation and the Company.
10.9.10 (e) OEM License Agreement, dated June 2, 1995, by and between
Acer America Corporation and the Company.
10.9.11 (e) OEM License Agreement, dated June 5, 1995, by and between
NEC Technologies, Inc. and the Company.
10.10.1 (b) Founders' Buy-Sell Agreement, dated February 22, 1989, by
and among Mark R. McCulley, Raymond Bily and the Company.
10.10.2 (b) Addendum to Founder's Buy-Sell Agreement, dated April 30,
1994, by and among Mark R. McCulley, Raymond Bily and the
Company.
10.10.3 (b) Shareholder Agreement, dated December 9, 1991, by and
among Raymond Bily, Mark R. McCulley and certain
shareholders of the Company, on the one hand, and the
Company, on the other hand.
34
<PAGE>
EXHIBIT NO. DESCRIPTION
----------- -----------
10.10.4 (e) Asset Purchase Agreement Among Midisoft Corporation,
Knowledge Engineering, Inc. and certain shareholders of
Knowledge Engineering, Inc. dated January 18, 1995.
10.10.5 (e) Asset Purchase and Sale Agreement by and among Midisoft
Corporation, Ask Me Multimedia,Inc. and Michael O'Donnell
dated April 14, 1995.
10.11.1 (c) U.S. Bank of Washington and the Company.
10.11.2 (b) Loan and Security Agreement, dated June 1, 1994, by and
between Silicon Valley Bank and the Company.
10.12.1 (e) Severance letter, dated July 24, 1995.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Price Waterhouse LLP
------------------
(a) Incorporated by reference from the Company's Registration
Statement on Form SB-2 (S.E.C. File No. 33-80064).
(b) Incorporated by reference from the Company's Registration
Statement on Form SB-2 (S.E.C. File No. 33-62468-5).
(c) Incorporated by reference from the Company's Form 10-KSB filed
March 30, 1994 (S.E.C. File No. 000-22172).
(d) Incorporated by reference from the Company's Form 10-KSB filed
April 13, 1995 (S.E.C. File No. 000-22172).
(e) Incorporated by reference from the Company's Form 10-KSB/A filed
August 4, 1995 (S.E.C. File No. 000-22172).
(f) Incorporated by reference from the Company's Form 10-QSB filed
November 14, 1996. (S.E.C. File No. 000-22172)
35
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MIDISOFT CORPORATION
(Registrant)
Date: April 15, 1997 By: /S/ Larry Foster
-------------------------------------
Larry Foster, Chairman of the Board,
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/S/ LARRY FOSTER Chairman of the Board, April 15, 1997
- ------------------------- President and Chief Executive
Larry Foster Officer
/S/ MELINDA A. BRYDEN Vice President, Finance and April 15, 1997
- ------------------------- and Chief Financial Officer
Melinda A. Bryden (Principal Accounting Officer)
/S/ JOHN BAUER Director April 15, 1997
- -------------------------
John Bauer
/S/ MARSHA MURRY Director April 15, 1997
- -------------------------
Marsha Murry
/S/ A. PETER PARSONS Director April 15, 1997
- -------------------------
A. Peter Parsons
Director April 15, 1997
- -------------------------
Stephen Sedmak
36
